Currency Futures and Options Markets - PowerPoint PPT Presentation

1 / 22
About This Presentation
Title:

Currency Futures and Options Markets

Description:

FUTURES CONTRACTS. 2. IMM (International Monetary Market) provides ... 1. Trading Locations 6. Quotes. 2. Regulation 7. Margins. 3. Frequency of 8. Credit risk ... – PowerPoint PPT presentation

Number of Views:118
Avg rating:3.0/5.0
Slides: 23
Provided by: joeg165
Category:

less

Transcript and Presenter's Notes

Title: Currency Futures and Options Markets


1
Currency Futures and Options Markets
  • Chapter 8

2
PART I.FUTURES CONTRACTS
  • I. CURRENCY FUTURES
  • Definition
  • contracts written requiring a standard
    quantity of an available currency at a fixed
    exchange rate at a set delivery date.
  • Private individuals are encouraged. Contracts
    have minimum price moves and daily price limits
    exist to restrict max daily price move

3
FUTURES CONTRACTS
  • 2. IMM (International Monetary Market) provides
  • a. an outlet for hedging currency
  • risk with futures contracts.

4
FUTURES CONTRACTS
  • b. Available Futures Currencies/Contract Size
  • 1.) British pound / 62,500
  • 2.) Canadian dollar /100,000
  • 3.) Euro / 125,000
  • 4.) Swiss franc / 125,000 5.) Japanese yen
    / 12.5 million
  • 6.) Mexican peso / 500,000
  • 7.) Australian dollar / 100,000

5
FUTURES CONTRACTS
  • c. Transaction costs
  • commission payment to a floor trader
  • d. Leverage is high
  • 1.) Initial margin required is
    relatively low (less than 2 of contract
    value).

6
FUTURES CONTRACTS SAFEGUARDS
  • e. Maximum price movements
  • 1.) Contracts set to a daily price limit
    restricting maximum daily price movements.
  • 2.) If limit is reached, a margin call may
    be necessary to maintain a minimum margin.

7
FUTURES CONTRACTS
  • g. Global futures exchanges
  • 1.) I.M.M. International Monetary Market
  • 2.) L.I.F.F.E.London International
    Financial Futures Exchange
  • 3.) C.B.O.T. Chicago Board of Trade
  • 4.) S.I.M.E.X.Singapore International
  • Monetary Exchange
  • 5.) D.T.B. Deutsche Termin Bourse
  • 6.) H.K.F.E. Hong Kong Futures Exchange

8
FUTURES CONTRACTS
  • B. Forward vs. Futures Contracts
  • Basic differences
  • 1. Trading Locations 6. Quotes
  • 2. Regulation 7. Margins
  • 3. Frequency of 8. Credit risk
  • delivery
  • 4. Size of contract
  • 5. Transaction Costs

9
FUTURES CONTRACTS
  • Advantages of futures
  • 1.) Easy liquidation
  • 2.) Well- organized and
  • stable market.
  • Disadvantages of futures
  • 1.) Limited to 7 currencies
  • 2.) Limited dates of
  • delivery
  • 3.) Rigid contract sizes.

10
FUTURES CONTRACTS
  • Profits and losses are paid over every day at the
    end of trading, a practice called marking to
    market.
  • Example An investor, on Tuesday morning, takes a
    long position in Swiss Franc futures contract
    that matures on Thursday afternoon. The price is
    0,75 for SFr 125,000.
  • (a) On Tuesday closing, price has risen to
    0,755.
  • ? Investor receives cash profit of 625
    (125,0000,005)
  • ? The initial contract is cancelled.
  • ? Investor receives a new contract with the
    current price.
  • The value of the contract is set to zero at the
    end of everyday.
  • (b) On Wednesday, price declines to 0.743.
  • ? Loss is 1500 (125,0000.012)
  • ? New contract at the same price
  • (c) On Thursday, price drops to 0.74. Investor
    pays 375 loss and takes delivery of Swiss
    Francs, paying the prevailing price of 0.74.

11
CURRENCY OPTIONS
  • PART II

12
CURRENCY OPTIONS
  • I. OPTIONS
  • A. Currency options
  • 1. Offer another method to hedge exchange
    rate risk.
  • 2. First offered on Philadelphia
  • Exchange (PHLX).
  • 3. Fastest growing segment of
  • the hedge markets.

13
CURRENCY OPTIONS
  • Buyers SellersWriters

Premium
Buy
Sell
Buy
Sell
PUT
CALL
14
CURRENCY OPTIONS
  • 4. Definition
  • A contract from a writer ( the seller) that
    gives the right not the obligation to the holder
    (the buyer) to buy or sell a standard amount of
    an available currency at a fixed exchange rate
    for a fixed time period.

15
CURRENCY OPTIONS
  • 5. Expiration Dates of Currency Options
  • a. American
  • Exercise date may occur any time up to the
    expiration date.
  • b. European
  • Exercise date occurs only at the
  • expiration date and not before.

16
CURRENCY OPTIONS
  • 7. Exercise Price
  • a. Sometimes known as the
  • strike price.
  • b. The exchange rate at which the option
    holder can buy or sell the contracted currency.

17
CURRENCY OPTIONS
  • c. Types of Currency Options
  • 1.) Calls
  • 2.) Puts

18
CURRENCY OPTIONS
  • 8. Status of an option
  • a. In-the-money
  • Call Spot gt strike
  • Put Spot lt strike
  • b. Out-of-the-money
  • Call Spot lt strike
  • Put Spot gt strike
  • c. At-the-money
  • Spot the strike

19
CURRENCY OPTIONS
  • 9. What is the premium?
  • - The price of an option that the writer
    charges the buyer.
  • B. Why Use Currency Options?
  • 1. For the firm hedging foreign exchange risk
    with Future event is very uncertain gains.

20
CURRENCY OPTIONS
  • 2. For speculators
  • - profit from favorable exchange rate
    changes.

21
CURRENCY OPTIONS
  • C. Using Forward or Futures Contracts
  • Forward or futures contracts are
  • more suitable for hedging a known amount of
    foreign currency flow.

22
Options Sample Problems
  • Ford buys a French put option (contract size
    FF250,000) at a premium of .01/FF. If the
    exercise price is .21 and the spot at expiration
    is .216, what is Fords profit (loss)?
Write a Comment
User Comments (0)
About PowerShow.com