f55 ER Ch07 Futures & Options

f55 ER Ch07 Futures & Options - 11/30/2010 Futures...

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11/30/2010 1 7 Chapter Seven Futures and Options on Foreign Exchange Chapter Objective: This chapter discusses exchange-traded currency futures and options contracts. 7-0 Chapter Outline Currency futures and Currency options contracts: Mechanics / how do they work? Quote interpretation Pricing Application 7-1 Applications Hedging Speculation
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11/30/2010 2 Futures Contracts: Preliminaries A futures contract is like a forward contract: It specifies that a certain currency will be exchanged for another at a specified time in the future at prices specified today. A futures contract is different from a forward contract: Futures are standardized contracts trading on organized exchanges with daily resettlement through a clearinghouse. 7-2 Futures Contract : Basics Contract specifying a standard quantity of a particular currency to be exchanged on a specific settlement date. Buy futures today: Agree to take delivery of the currency Buy futures today: Agree to take delivery of the currency on (a future) settlement date: To hedge: Avoid uncertainty involved in buying FX at a future date. (eg., cover future FX payables) To speculate: Make a bet that future spot rate > current futures price Sell futures today: Agree to deliver the currency on (a future) settlement date: To hedge: Avoid uncertainty involved in selling FX at a future date. (eg., cover future FX receivables) To speculate: Make a bet that future spot rate < current futures price Futures contracts are also available on: Agricultural products and livestock / Metals and petroleum / Interest rates / Stock market indices
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11/30/2010 3 Futures Contracts: Characteristics Standardizing Features: Exchange Traded Contract Size Delivery Month Daily resettlement Margin: Called performance bonds (about 2 tf t t l h T bill h ld i percent of contract value, cash or T-bills held in a street name at your brokerage). Initial Margin Maintenance Margin 7-4 Basic Difference Between Forward and Futures Contract Market for Forward Contract Market for Futures Contract 1. Traded via telephone network 2. Individually tailored size 3. Any agreed upon delivery date 4. Settlement occurs as agreed upon 5. Transaction costs: bid-ask basis 6. Margin: not required 7. Credit risk: borne by each party 1. Traded face to face, in the exchange 2. Standardized size 3. Specified delivery date 4. Daily settlement, marked to market 5. Transaction costs: brokerage fee 6. Margin: required 7. Credit risk: exchange acts as clearing house
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11/30/2010 4 Currency Futures Markets The Chicago Mercantile Exchange (CME) is by far the largest. Others include: The Philadelphia Board of Trade (PBOT) The MidAmerica Commodities Exchange The Tokyo International Financial Futures Exchange The London International Financial Futures Exchange 7-6 The Chicago Mercantile Exchange Expiry cycle: March, June, September, December.
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f55 ER Ch07 Futures &amp;amp; Options - 11/30/2010 Futures...

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