Chapter 20: Foreign Currency Futures and Options 熊家财 江西财经大学会计学院 xiongjc-p@163.com Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

Chapter 20: Foreign Currency Futures and Options 20.1 The Basics of Futures Contracts 20.2 Hedging Transaction Risk with Futures 20.3 Basics of Foreign Currency Option Contracts 20.4 The Use of Options in Risk Management 20.5 Combinations of Options and Exotic Options Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

20.1 The Basics of Futures Contracts Futures Versus Forwards Foreign currency futures contracts Exchange trading Standardized amounts Fixed maturities Credit risk Commodity futures trading commission (CFTC) as a futures commission merchant (FCM) Clearing member/clearinghouse Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

20.1 The Basics of Futures Contracts Futures Versus Forwards Foreign currency futures contracts Exchange trading Standardized amounts Fixed maturities Credit risk Commodity futures trading commission (CFTC) as a futures commission merchant (FCM) Clearing member/clearinghouse Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

20.1 The Basics of Futures Contracts Margins Margin account Initial margin Marking to market Maintenance margins Margin call Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

20.1 The Basics of Futures Contracts Marking to market Settle price Open interest Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

Exhibit 20.1 An Example of Marking to Market in the Futures Market Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

20.1 The Basics of Futures Contracts The Pricing of Futures Contracts The payoff on a forward contract The payoff on a futures contract Why futures can differ from forwards Wall street journal futures quotes Open price Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

Exhibit 20.2 Futures Quotes (Wall Street Journal, December 2, 2004) Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

20.2 Hedging Transaction Risk with Futures Hedging at Nancy Foods The Hedging Decision Potential Problems with a Futures Hedge Basis risk Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

Exhibit 20.3 Hedging a Receivable with Futures Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

20.3 Basics of Foreign Currency Option Contracts Introduction Foreign currency option contract Basic Option Terminology Foreign currency call option Foreign currency put option Option premium Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

20.3 Basics of Foreign Currency Option Contracts Basic Option Terminology (cont’d) European vs. American options European option American option Early exercise Strike prices and intrinsic value Strike price Exercise price Intrinsic value Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

20.3 Basics of Foreign Currency Option Contracts Options Trading Currency options on the Philadelphia stock exchange Currency options on the Chicago mercantile exchange Wall street journal options quotes Exchange-listed currency warrants Currency warrants Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Exhibit 20.4 Options on Futures Quotes (Wall Street Journal, December 2, 2004) Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

20.4 The Use of Options in Risk Management The Use of Options in Risk Management: Overview Using Options to Hedge Transaction Risk Hedging With Options as Buying Insurance Speculating With Options Options Valuation An Alternative Representation of Put-Call Parity Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

20.4 The Use of Options in Risk Management Using Options to Hedge Transaction Risk Allows a hedge but maintains the upside potential from favorable exchange rate changes Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

Exhibit 20.5 Hedging Pound Revenues Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

Exhibit 20.6 Hedging Swiss Franc Costs Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

20.4 The Use of Options in Risk Management Hedging With Options as Buying Insurance Hedging foreign currency risk with forwards and options Options as insurance contracts As amount of coverage increases so does the cost (premium) to insure Changing the quality of the insurance policy Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

Exhibit 20.7 Hedging and Speculating Strategies Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

Exhibit 20.8 Alternative Option Hedges Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

20.4 The Use of Options in Risk Management Speculating With Options Speculating on foreign currency receivables Speculating on foreign currency liabilities Foreign currency put option Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

Exhibit 20.9 Speculating with Pound Revenue Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

20.4 The Use of Options in Risk Management Options Valuation The intrinsic value of an option The time value of an option Increasing the exercise price An increase in the variance Increasing the time to expiration Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

Exhibit 20.10 Probability Distribution of Future USD/EUR Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

Exhibit 20.11 Probabilities of Exercising Alternative Options Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

Exhibit 20.12 Different Probability Distributions of Future USD/EUR Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

20.4 The Use of Options in Risk Management Options Valuation (cont’d) Put-call parity for foreign currency options Put-call parity Synthetic forward contract Conversion Reversal Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

20.5 Combinations of Options and Exotic Options Combinations of Options and Exotic Options: Overview Introduction Range Forwards and Cylinder Options Other Exotic Options Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

20.5 Combinations of Options and Exotic Options Introduction Exotic options Options with different payoff patterns features than the basic options Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

20.5 Combinations of Options and Exotic Options Range Forwards and Cylinder Options Range forward contract Cylinder options Synthetic cylinder options Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

20.5 Combinations of Options and Exotic Options Other Exotic Options Average-rate options Barrier options Lookback options Digital options Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall