5. Forwards-b/w firm and commercial bank to exchange a specified amt of currency at the fwd. rate on a specified future date -usually $1 million, and not used by ind. Consumers or small firms usually individualized contracts - Mostly settled by actual delivery (buy when expect to appreciate, sell app) F=S(1+p) If forward rate is less than spot rate, it’s discount-Usually represent difference between home and foreign interest rates P=(F-S/S) * (360/n) –if annualized use this part Swap Transactions-Spot and forward contracts used simultaneously that will reverse the spot transaction-Ex: Today you withdraw USD from account and convert to pesos in spot market and send to Mexican acct. And in one year you withdraw the million pesos and convert them to dollars at today’s forward rate and then put them in your account. You receive fewer dollars in one year but avoid the risk of exchange rate movements NDFs-Net payments, no actual exchange-EX: Current spot rate is .002$/peso…this is on the contract as the reference rate, which is used to settle the contract. You agree to pay 100m pesos (200,000 dollars at .002$/peso) no matter what happens to the exchange rate. If rate goes up to .0023, u pay the supplier 230,000 but the bank gives u a refund of the extra 30,000. Opposite happens if the rate goes down to .0018 and u only have to pay 180,000. U owe the bank 20,000. Futures- Contracts specifying a standard volume of a particular currency to be exchanged at a specific settlement date-Used to hedge or speculate-Standardized, Traded on exchange, brokers or by firms. Typically commison charges-Liquidation –mostly settled by offsetting and not actual delivery Guaranteed by exchange clearing house and margin requirements-Speculators sell futures when currency is expected to depreciate, buy depreciating currency at spot rate, which results in a profit at settlement date when they fulfill the contract. And vise versa.-MNCs purchase futures to hedge payable and sell to hedge recieveables-Can close out cotnracts by selling similar futures contracts and minimizing losses or sellers can close out by buying similar ones. . I-f you buy one and the currency depreciates, sell it and minimize your loss. Call Options-Grants holder the right to buy a specific currency at a specific price within a period of time-In the money (spot>strike) out of the money(spot<strike)-Premium higher if (spot-strike) is large, time to expiry is long, and variability of currency is great.
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This note was uploaded on 04/07/2008 for the course FIN 4604 taught by Professor Knill during the Spring '08 term at FSU.