Forward contract F=The forward rate in terms of payment currency S=The spot rate in terms of payment currency (R1=Interest on payment currency (yearly.

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Presentation transcript:

Forward contract F=The forward rate in terms of payment currency S=The spot rate in terms of payment currency (R1=Interest on payment currency (yearly (R2=Interest on basic currency (yearly Or 365 days

Forward contract-Example F=The £ Forward rate -BID S=The £ Spot rate-BID $ R$= Yearly interest on a Deposit in Indirect quote £ R £ = Yearly interest on a Loan in

Hedge strategy with forward Canceling the risk by getting to opposite position If we long the currency - we would sell the forward contract If we have a loan in the currency - we would buy the forward contract

Example A U.S.A company expects to get 2 million euro in 3 months The spot rate is $/Euro The cost of product is 1.4 Euro The company expects a profit of $285,200 The company is exposed to market risk

The strategy Short a Forward contract on the Euro The company will sell a forward contract for 3 month on the Euro The forward rate is $/Euro The company locked a profit of $291,200 With Forward

Graph Short fwd ASSET Profit (Asset in Euro (long Short the fwd on the Euro Euro/$

Synthetic Forward Short a Euro Forward = Buy a Euro call and sell a Euro put, the same.strike and the expiry date Buy a Euro put vanilla option, strike.8380,expiry 3 months from today Sell a Euro call reverse knock in, strike.8380 with trigger of.887,expiry 3 months from today With Options The price of the strategy - zero cost

Synthetic Forward Buy a Euro put vanilla option and sell Euro call reverse knock in ; trigger to the same expiry date at zero cost Short fwd ASSET Profit TRIGGER Euro/$