FINS 3616 Lecture Notes-week 3

FINS 3616 Lecture Notes-week 3 - ¡ Week 3 Ø Currency...

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Unformatted text preview: ¡ Week 3 Ø Currency Futures and Futures Markets - Ref: Butler ch 5 Ø Currency Options and Option Markets - Ref: Butler ch 6 ¡ Chapter 5 Currency Futures and Futures Markets Learning objectives P Currency futures – Credit risk and the futures contract solution – Currency futures exchanges – Currency forwards versus currency futures P Hedging with futures contracts – Basis risk and the hedge ratio – Delta, cross, and delta-cross hedges ¡ Chapter 5 Currency Futures and Futures Markets Learning objectives P Currency futures – Credit risk and the futures contract solution – Currency futures exchanges – Currency forwards versus currency futures P Hedging with futures contracts – Basis risk and the hedge ratio – Delta, cross, and delta-cross hedges 1. Suppose Rio Tinto will receive $40 million from its US customer one year later (1 st August 2012), what can they do to hedge against currency rate volatility? Forward Contract Date: 1 st August 2011 Parties: Rio Tinto (US dollar seller) & ANZ bank (US dollar buyer) Maturity: one year, 1 st August 2012 Amount: $40 million Forward rate: A$1.2/$ Location: ANZ bank Future Contract Date: 1 st August 2011 Parties: Rio Tinto (US dollar seller) & ASX (US dollar buyer) Maturity: 1 st Sep 2012 Amount: $1 million (Rio Tinto has to purchase 40 contracts) Future rate: A$1.2/$ Location: Exchange floor of ASX ¡ Credit risk and the futures contract solution Ø Forwards are a pure credit instrument - Forwards are a zero-sum game , so that one party always has an incentive to default Ø The futures contract solution - A futures exchange clearinghouse takes one side of every transaction (and makes sure that its exposures cancel one another) - Initial and maintenance margins ensure settlement - Contracts are marked-to-market daily ✓ Currency futures contracts and exchanges Hedging with currency futures Credit risk and the futures contract solution ✓ Currency futures exchanges Currency forwards versus currency futures ¡ Financial futures exchanges are often associated with a commodity futures exchange 2006 contract Top futures exchanges volume (mil) 1 CME- Chicago Mercantile Exchange (U.S.) 1,101.7 2 Eurex- Eurex (Germany & Switzerland) 960.6 3 CBOT- Chicago Board of Trade (U.S.) 678.3 4 Euronext- (Amsterdam/Brussels/Lisbon/Paris/London) 420.0 5 Mexican Derivatives Exchange - (Mexico City) 274.7 6 BM&F- Bolsa Mercadorias & de Futuros (Brazil) 258.5 7 NYMEX- New York Mercantile Exchange (U.S.) 216.3 8 Dalian Commodity Exchange- (China) 170.6 9 National Stock Exchange of India- (India) 117.7 10 ICE Futures - (U.K.) 92.6 Source: Futures Industry Association (www.futuresindustry.org ) ✓ Currency futures contracts and exchanges Hedging with currency futures Credit risk and the futures contract solution Currency futures exchanges ✓ Currency forwards versus currency futures ¡ A forward hedge of the dollar Underlying position of a Australian exporter (long $s) Sell $s forward at F t A$/$ = A$1.20/$ (short $) = A$1....
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This note was uploaded on 08/06/2011 for the course FIN 3616 taught by Professor Henry during the Three '11 term at University of New South Wales.

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FINS 3616 Lecture Notes-week 3 - ¡ Week 3 Ø Currency...

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