Final Study Guide - Final Study Guide Chapter 7 Futures...

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Final Study Guide Chapter 7 Futures Contract is like a Forward Contract: o Specifies a certain currency will be exchanged for another at a specified time in the future at prices specified today Futures Contract is different from a Forward Contract: o Futures are standardized contracts trading on organized exchanges with daily resettlement through a clearinghouse Futures Contracts: Standardizing Features: Contract Size Delivery Month Daily Resettlement Every trading day: o If price goes down, long pays the short o If price goes up, the short pays the long After daily resettlement, each party has a new contract at the new price with one- day-shorter maturity The Chicago Mercantile Exchange (CME): largest currency futures market o Expiry Cycle: March, June, September, December o Delivery Date: Third Wednesday of delivery month o Last Trading Day: Second Business Day preceding the delivery day o CME hours: 7am-2pm CST o Extended-hours trading on GLOBEX: 2:30-4pm and then 6pm-6am CST o The Singapore Exchange (SiMEX) offers interchangeable contracts o No other market is close to CME and SIMEX trading volume o Others include: The Philadelphia Board of Trade (PBOT) The MidAmerica Commodities Exchange The Tokyo International Financial Futures Exchange The London International Financial Futures Exchange Open Interest: refers to number of contracts outstanding for a particular delivery month o Good proxy for demand for a contract o Some refers to open interest as the depth of the market o Breadth of market is how many different contract are outstanding Eurodollar: widely used future contract for hedging short-term US dollar interest rate risk; traded on CME and SIMEX; contract is cash settled o Stated as index # of 3month LIBOR calculated as: F=100-LIBOR Option Contract: o An option gives holders the right, but not the obligation to buy or sell a given quantity of an asset in the future at prices agreed upon today o Call Options: Buy
o Put Options: Sell European vs. American Options: o European options: can only be exercised on expiration date o American options: can be exercised at any time up to and including expiration date; generally worth more In-the-money: Exercise price (pre-decided rate) is less than the spot price (current market price) of the asset At-the-money: Exercise price is equal to the spot price of the asset Out-of-the-money: Exercise price is more than the spot price of the asset Intrinsic Value: the difference between the exercise price of the option and the spot price of the asset Speculative Value: The difference between the option premium and the intrinsic value of the option Currency Option Markets: PHLX; HKFE; 20 hr trading day; OTC volume is much bigger than exchange volume; trading in 6 major currencies against dollar Currency Futures Options: an option on a currency futures contract o Exercise of currency futures option results in a long future position for the holder of a call or writer of a put o

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