Chapter 5 ? Foreign Currency Derivatives
Use of Derivatives
- Speculation: To make money
- Hedging: To reduce the risk of future cash flows
Questions: 9, 10
Problems: 2, 5, 9
Futures Contract
Def: Is similar to a Forward contract in the sense that it is an agreement between two parties about a future delivery of an amount of foreign exchange at a fixed price, time, and place. The main difference is that futures are a standardized contract traded on an exchange while forwards are negotiated.
Short Position: Want to sell. (eg. p96) You are expecting the currency to fall in value. Therefore you chose to sell the currency in the future to make a speculative profit.
Short Position (value at maturity) = - contract amount x (spot rate at maturity? futures rate/settle price)
Long Position: Want to buy (eg p 96). You are expecting the currency to gain in value. Therefore you chose to buy the currency in the future to make a speculative profit.
Long Position (value at maturity) = contract amount x (spot rate at maturity ? futures rate/settle price)
Example of a Future: Slide 5-4
Contract Specifications of Futures: Slide 5-6
Futures vs. Forwards: (full list on p98) Main points below
- Futures involve a margin account (a minimum amount of cash at the brokers. Can be waved for trusted clients)
- Gains and losses are settled immediately (mark to market). They are added/subtracted from the margin account
- If the margin account gets too low (a previously agreed amount), the client is asked to put more money in. Known as a Margin Call. This results in Futures having little risk for th ...