536-3a_note[1]

536-3a_note[1] - 536-3a_note 11S FIN 536 – SU Page 1 of...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 536-3a_note, 11S FIN 536 – SU Page 1 of 15 Topic 3 Foreign Currency Derivatives (Chapter 8) I.Outline A.Currency Futures & Forward 1.Contract specification 2.Daily Settlement 3.Reading Quotation B.Currency Option 1.Introduction 2.Profit Profiles at Maturity 3.Category 4.Reading Quotation C.Skip Option Pricing and Valuation (pp. 211-221) II.Homework Assignment Chapter8End-of-Chapter Question1, 3, 5, 7End-of-Chapter Problem (P)3, 4Exam Sample Problem (ES) 1-10 Supplementary Homework Problem (SH)1-4========================================================= Class Notes I.Currency Future contracts A.A closer look at the currency future contracts: 1.Contract specification (pp. 198) 2.Comparison of Foreign Currency Forwards and Futures (Ex. 8.2) a)Location & Hours b)Size c)Maturity d)Pricing e)Commissions f)Collateral g)Credit Risk h)Liquidity i)Settlement 3.Long position & Short position 4.Profit Profile: 5.Performance Bond (Margin) requirement: a)Initial Performance Bond b)Daily settlement - marking to market c)Maintenance performance bond d)Performance bond call. 536-3a_note, 11S FIN 536 – SU Page 2 of 15 B.Currency Futures: Daily Settlement 1.Daily Settlement Example 1: Buy a currency future contract Time Action Profit Performance Bond Mon. MorningBuy 1 IMM SF futures contract at F = 0.98 $/SF. 125,000 per contract, I.P.B.=$2430, M.P.B.=$1800Mon. CloseF = 0.985 $/SFTue. CloseF = 0.973 $/SFWed. closeF = 0.970 $/SF Offset trading Pay a round-trip commission $30a)What is the daily profit and balance of the performance bond account? (1)How do you engage in the offsetting trade? (2)Based on the “profit” column, how much is your total profit (including the commission)? (3)Verify your answer using the Performance Bond balance information. b)Repeat question a) , assuming there is no daily settlement. c)Repeat question a) , assuming that at maturity, you decide to settle the contract through “physical delivery”. (1)Based on the “profit” column, how much is your total profit (including the commission)? (2)Specify the “transactions” involved in the physical delivery. (3)How much do you pay (your final $ cost) for buying one SF future contract? d)Repeat question c) , assuming there is no daily settlement. e)What can you tell from these four different scenarios? Elaborate. With Daily Settlement Without Daily Settlement Cash settlement (Offset trading) Physical Delivery 536-3a_note, 11S FIN 536 – SU Page 3 of 15 2.Daily Settlement Example 2: Sell a currency future contract Time Action Profits Performance Bond Mon. MorningSell September € futures at F=1.2800 $/€. 125,000 per contract, I.P.B.=$4050, M.P.B.=$3000Mon. CloseF= 1.2860 $/ € Tue. CloseF =1.3050 $/ €Wed. closeF = 1.2910 $/ € Offset trading Pay a round-trip commission $30a)What is the daily profit and balance of the performance bond account?...
View Full Document

Page1 / 15

536-3a_note[1] - 536-3a_note 11S FIN 536 – SU Page 1 of...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online