ch05_2 - 5-1Butler / Multinational FinanceChapter 5...

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Unformatted text preview: 5-1Butler / Multinational FinanceChapter 5 Currency Futures and Futures MarketsPart IIPart IIDerivative Securities forDerivative Securities forFinancial Risk ManagementFinancial Risk ManagementCh 5Currency futures and futures marketsCh 6Currency options and options marketsCh 7Currency swaps and swaps markets5-2Butler / Multinational FinanceChapter 5 Currency Futures and Futures MarketsChapter 5Chapter 5Currency Futures and Futures MarketsCurrency Futures and Futures MarketsLearning objectivesCurrency futures Credit risk and the futures contract solution Currency futures exchanges Currency forwards versus currency futuresHedging with futures contracts Basis risk and the hedge ratio Delta, cross, and delta-cross hedges5-3Butler / Multinational FinanceChapter 5 Currency Futures and Futures MarketsCredit risk and the futures contract solutionForwards are a pure credit instrument-Forwards are a zero-sum game, so thatone party always has an incentive to defaultThe futures contract solution-A futures exchange clearinghousetakes one side of every transaction (and makes sure that its exposures cancel one another)-Initial and maintenance margins ensure settlement -Contracts are marked-to-marketdaily Currency futures contracts and exchangesHedging with currency futuresCredit risk and the futures contract solution Currency futures exchangesCurrency forwards versus currency futures5-4Butler / Multinational FinanceChapter 5 Currency Futures and Futures MarketsFinancial futures exchanges are often associated with a commodity futures exchange2006 contract Top futures exchangesvolume (mil)1 CME- Chicago Mercantile Exchange (U.S.)1,101.72 Eurex- Eurex (Germany & Switzerland)960.6 3 CBOT- Chicago Board of Trade (U.S.)678.34 Euronext- (Amsterdam/Brussels/Lisbon/Paris/London)420.05 Mexican Derivatives Exchange - (Mexico City) 274.76 BM&F- Bolsa Mercadorias & de Futuros (Brazil) 258.57 NYMEX- New York Mercantile Exchange (U.S.)216.38 Dalian Commodity Exchange- (China) 170.69 National Stock Exchange of India- (India) 117.710 ICE Futures - (U.K.) 92.6Source: Futures Industry Association (www.futuresindustry.org)Currency futures contracts and exchangesHedging with currency futuresCredit risk and the futures contract solutionCurrency futures exchanges Currency forwards versus currency futures5-5Butler / Multinational FinanceChapter 5 Currency Futures and Futures MarketsMillions of contracts tradedSource: Futures Industry Association (www.futuresindustry.org)Growth of derivatives tradingCurrency futures contracts and exchangesHedging with currency futuresCredit risk and the futures contract solutionCurrency futures exchanges Currency forwards versus currency futures5-6Butler / Multinational FinanceChapter 5 Currency Futures and Futures MarketsA forward hedge of the dollarUnderlying position of a French exporter (long $s)Sell $s forward at Ft/$= 0.80/$ (short $)Net position-Goods+50 million-$40 millionv/$Long $ss/$...
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This note was uploaded on 07/07/2011 for the course FINS 5516 taught by Professor Dl during the Three '11 term at South Australia.

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ch05_2 - 5-1Butler / Multinational FinanceChapter 5...

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