FUTURE_OPTIONS_FOREX

FUTURE_OPTIONS_FOREX - Futures and Options Foreign Exchange...

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Unformatted text preview: Futures and Options Foreign Exchange Market Introduction to a futures contract The Futures Contract § Willing buyer & seller agree on price today for future delivery § Apartment lease or airline ticket are types of forward contracts § Futures contracts are homogeneous with regard to contract size, delivery date & location Introduction to a futures contract The Futures Contract § Type of deferred delivery contract § Traders publicly set a price for subsequent delivery within a specified time period & place § Exchange specifies major terms & conditions of the contract, except for the price § The buyer & seller of the contract make equal & offsetting commitments § These commitments are legally binding, but can be offset § Most futures contracts do not result in delivery & some do not permit delivery Introduction to an options contract The Options Contract § The holder of a futures contract has the obligation to either deliver (accept delivery) of the underlying asset or instrument or settle at the cash price. § Some futures contracts allow delivery and others do not. § Alternatively, the holder of an “option” has the “right” but not the ‘obligation’ to either buy (or Introduction to an options contract The Options Contract § A “ call ” option gives the buyer the right (but not the obligation) to purchase a futures contract at a specified strike price & during a specific time period § A “ put ” option gives the buyer the right (but not the obligation) to sell a futures contract at a specified strike price & during a specific time period Important concepts § Difference between speculators & hedgers § Going long versus short § Delivery months § Contract specifies delivery or cash settle, but “long” or “short” can liquidate any time prior to the delivery month § Seller has option to deliver any time during delivery month Why have futures markets? § Markets add space, form, & time utility § Futures & Options contracts have time utility because you can buy & sell contracts into the future § Futures markets are regulated to ensure they remain competitive Economic function of futures and options § Provides returns to storage § Disseminates information § Discover prices § Shifts price risks Terminology § Brokerage House, Broker, § Clearinghouse § Hedger, Speculator § Long, Short § Bid, Offer § Liquidation § Carrying Charge § Volume, Open Interest § Puts, Calls Date Trade Futures Month Futures Price Oct. Go Long March 0.93 $/EC Dec. Go Short March 0.99 $/EC Profit (Loss) $.06 × 125,000 € = $7,500 Note: US dollar weakens in this example A futures trade: European Euro (CME) A futures trade: European Euro (CME) Same trade but $US strengthens… Profit (Loss): $.08 × 125,000€ = ($10,000) Loss Date Trade Futures Month Futures Price Oct. Go Long March 0.93 $/EC Dec. Go Short March 0.85 $/EC The clearinghouse Operation Of The Clearinghouse (100 oz GOLD Contract) Time Buyer Seller Contract Cl. House Open Open Per. Value Position Longs Shorts 1 A B $36,000 A’s Seller A B B’s Buyer The clearinghouse...
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FUTURE_OPTIONS_FOREX - Futures and Options Foreign Exchange...

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