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CH06 - CHAPTER 6 CURRENCY FUTURES AND OPTIONS CHAPTER...

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CHAPTER 6 CURRENCY FUTURES AND OPTIONS CHAPTER OUTLINE I. The Currency Futures Market a) Futures market participants b) The futures market and the forward market c) How to read currency futures quotes d) Market operations (1) Margin requirements (2) Speculation in the futures market (3) Hedging in the futures market (4) Trading volume in currency futures II. The Currency Options Market a) Basic terms b) How to read currency option quotes c) Currency option premiums (1) Intrinsic value (2) Time value (3) Value of exchange-rate volatility (4) Summary d) Currency call options (1) Hedging in the call options market (2) Speculating in the call options market (3) Graphic analysis of a call-option price e) Currency put options (1) Graphic analysis of a put-option price f) Profit-loss profiles of options III. Futures Options IV. Summary 42
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CHAPTER OBJECTIVE Chapter 6 describes three closely related topics: currency futures, currency options, and currency futures options. The purpose of this chapter is to show how these three tools can be used to manage foreign exchange risk or take speculative positions on exchange-rate changes. Furthermore, the chapter discusses how to read the prices of these contracts as they appear in the Wall Street Journal . KEY TERMS AND CONCEPTS Currency futures contract is a contract with which one buys or sells a specific foreign currency for delivery at a designated price in the future. Currency option is the right to buy or sell a foreign currency at a specified price through a specified date. Currency futures option is the right to buy or sell a futures contract of a foreign currency at any time for a specified period. Hedgers are traders who buy and sell currency futures contracts to protect the home currency value of foreign-currency denominated assets and liabilities. Speculators are traders who buy and sell currency futures contracts for profit from exchange rate movements. Long position is an agreement to buy a futures contract. Short position is an agreement to sell a futures contract. Initial margin is the amount market participants must deposit into their margin account at the time they enter into a futures contract. Maintenance margin is a set minimum margin customers must always maintain in their account. Margin calls are broker requests for additional money. Performance bond margins are financial guarantees imposed on both buyers and sellers to ensure that they fulfill the obligation of the futures contract. Spread trading means buying one futures contract and simultaneously selling another contract. Currency call option gives the buyer the right, but not the obligation, to buy a particular foreign currency at a specified price anytime during the life of the option. 43
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Currency put option gives the seller the right, but not the obligation, to sell a particular foreign currency at a specified price anytime during the life of the option.
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