Sample hedging with futures and options Objective Exemplify the use of futures, forwards and options.

Slides:

Advertisements

Similar presentations

Hedging Foreign Exchange Exposures. Hedging Strategies Recall that most firms (except for those involved in currency-trading) would prefer to hedge their.

Advertisements

Hedging an uncertain amount Concepts and examples.

8-1 Lecture #11 Hedging foreign currency risk: Issues in and out of China Aaron Smallwood, PhD. UT-Arlington.

13 Management of Transaction Exposure Chapter Objective:

1 (of 24) IBUS 302: International Finance Topic 5-The Market for Foreign Exchange II Lawrence Schrenk, Instructor.

A Presentation on Hedging as Exchange Risk Offsetting Tool Presented by AKM Abdullah October 26, 2004.

1 (of 26) IBUS 302: International Finance Topic 12–Transaction Exposure I Lawrence Schrenk, Instructor.

Exchange Rates and the Foreign Exchange Market:

Spot and Forward Rates, Currency Swaps, Futures and Options

Chapter 15 International Business Finance Key sections –Factors affecting exchange rates –Nature of exchange risk and types –How control exchange risk?

Chapter 15 International Business Finance Key sections –Factors affecting exchange rates –Nature of exchange risk and types –How control exchange risk?

Foreign Exchange Chapter 11 Copyright © 2009 South-Western, a division of Cengage Learning. All rights reserved.

Exchange Rates and the Foreign Exchange Market

Chapter 15. International Business Finance n Exchange Rate: the price of one currency in terms of another.

Hedging with Foreign Currency Options By Soeren Hansen.

Foreign Exchange Markets and Exchange Rates. Foreign Exchange Markets A network of systems and mechanisms through which currencies are traded Market actors:

Exchange Rates and the Foreign Exchange Market:

Chapter 7 The Foreign Exchange Market. Outlines… Introduction, The Structure Of Foreign Exchange Market, Functions of foreign exchange markets Spot Market.

Currency Futures and Forwards. Outline Meaning of Futures Features of Futures Contracts Using Futures for Hedging and Speculation Meaning of Forwards.

Danielle Gardner Donna Zviely Garrett McCulloch.  Relative interest rates: ◦ Higher short term and long term rates in Europe than most other major currencies.

Chapter 13 Supplementary Notes. Exchange rate The price of a currency in terms of another currency DC = $, FC = € The exchange rate can be quoted as –DC.

1 ECONOMICS 3150M Winter 2014 Professor Lazar Office: N205J, Schulich

Chapter 24 Risk Management: An Introduction to Financial Engineering Homework: 1,4,5 & 6.

Global foreign exchange market turnover. Foreign Exchange Transactions A foreign exchange market transaction is composed of: spot, outright forward and.

Chapter 13 The Foreign Exchange Market. Copyright © 2007 Pearson Addison-Wesley. All rights reserved Topics to be Covered Foreign Exchange Market.

McGraw-Hill /Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. 9-1 Chapter Nine Foreign Exchange Markets.

Exchange Rates and the Foreign Exchange Market: An Asset Approach.

Market that facilitated the exchange of currencies- buying and selling. Largely an OTC (over the counter) market. Means there is no single market place,

Chapter 1 Introduction Options, Futures, and Other Derivatives, 8th Edition, Copyright © John C. Hull 2012.

The Foreign Exchange Market (Part II). © 2002 by Stefano Mazzotta 1 Learning Outcomes 1.Foreign currency forwards 2.Foreign currency futures.

Hedging with Derivatives and Money Market Hedge

21 Risk Management ©2006 Thomson/South-Western. 2 Introduction This chapter describes the various motives that companies have to manage firm-specific.

Fundamentals of Futures and Options Markets, 7th Ed, Ch 1, Copyright © John C. Hull 2010 Introduction Chapter 1 (All Pages) 1.

Risk and Derivatives etc. Dr Bryan Mills. Traditional (internal) methods of risk management External: – banks, etc e.g. hedge, options, forward contracts.

Ch. 22 International Business Finance  2002, Prentice Hall, Inc.

International Trade and Exchange Rates Outline Balance of payments accounting Exchange rates—how are they determined? Exchange rates and the price of.

Foreign Exchange (FOREX) The buying and selling of currency – Ex. In order to purchase souvenirs in France, it is first necessary for Americans to sell.

International Finance FINA 5331 Lecture 14: Hedging currency risk with currency options Aaron Smallwood Ph.D.

1 Transaction Exposure Transaction exposure measures gains or losses that arise from the settlement of existing financial obligations whose terms are stated.

Introduction Chapter 1 Options, Futures, and Other Derivatives, 7th International Edition, Copyright © John C. Hull

Foreign Currency Transactions and Hedging Foreign Exchange Risk

McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 Foreign Currency Transactions and Hedging Foreign.

Foreign Currency Risk Part 1 Mark Fielding-Pritchard mefielding.com1.

International Trade and Exchange Rates Outline Balance of payments (BOP) accounting How open is the U.S. economy? Description of international trade Exchange.

Accounting Exposure Translation exposure measures the change in the book value of the assets and liabilities excluding stockholders equity as residual.

Foreign Currency Risk Part 2 Mark Fielding-Pritchard mefielding.com1.

International Trade Mechanics of Foreign Exchange (FOREX)

Copyright © 2012 Pearson Addison-Wesley. All rights reserved. Chapter 14 Exchange Rates and the Foreign Exchange Market: An Asset Approach.

þBOP accounting is the recording of transactions between domestic and foreign economic agents. þAny transaction that results in a receipt of money by.

Chapter 5: Foreign Exchange Markets and the Balance of Payments

©2007, The McGraw-Hill Companies, All Rights Reserved 8-1 McGraw-Hill/Irwin Chapter Eight Foreign Exchange Markets.

The Currency Futures and Options Markets

B PROBLEM OF FORWARD CONTRACT b DEFINITION OF OPTION CONTRACT & BENEFIT OVER FORWARD CONTRACT b OPTION TERMINOLOGIES - CALL OPTION - PUT OPTION - BUYER.

Currency Hedging MJY plc December 05 Mark Fielding-Pritchard mefielding.com1.

Foreign Currency Options Chapter Seven Eiteman, Stonehill, and Moffett 11/21/20151Chapter Seven - Derivatives.

Eco 200 – Principles of Macroeconomics Chapter 7: Foreign Exchange Markets and the Balance of Payments.

© Foreign Currency Options II. © Using Options for Hedging.

Currency Futures Introduction and Example. FuturesDaniels and VanHoose2 Currency Futures A derivative instrument. Traded on centralized exchanges (illustrated.

DERIVATIVES By R. Srinivasan. Introduction  A derivative can be defined as a financial instrument whose value depends on (or is derived from) the values.

College Bowl Round #5. Question #1 We’ve all heard of OPEC (Organization of Petroleum Exporting Countries), but very rarely do we hear about OBEC (organization.

International Financial Management Learning Goals: Reasons for international business Unique considerations of international business Exchange rates Eurocurrency.

Foreign Exchange (FX) Exchange rates are one of the key linkages between a country and the rest of the world, both in goods/services and financial and.

Chapter 22 International Business Finance International Business Finance  2005, Pearson Prentice Hall.

International Financial System Market for converting currency of one country into that of other is Foreign Exchange Market Demand and supply of currencies.

International Finance Balance of Payments Foreign Exchange Markets Foreign Exchange Rates Spot rates and forward rates Foreign Exchange Systems Risk Management.

Lecture 3 Foreign Exchange Markets and Exchange Rates.

A Pak company exports US$ 1 million goods to a customer in united states with a payment to be received after 3 months. A Pak company exports US$ 1 million.

宁波工程学院国商教研室蒋力编 Chapter 4 Forward-Looking Market Instrument.

Eco 200 – Principles of Macroeconomics

Presentation transcript:

Sample hedging with futures and options

Objective Exemplify the use of futures, forwards and options

Outline Introduction A long hedge using futures A short hedge using futures Hedging with call options Hedging with put options Knowing what position to take when hedging

A long hedge with foreign currency futures On July 1, an American auto-dealer buys 20 Jaguars from England at L 35,000/car. The payment - in pounds - is due on November 1. The buyer wants to hedge against a possible appreciation of the pound against the dollar.

A long hedge with foreign currency futures

Analysis: total cost of the auto-dealer under different scenarios

A short hedge with foreign currency futures On April 3 an American firm decides to transfer L 10,000,000 from London to New York, to a dollar denominated account. The transfer will be made on September 29. The firm fears that the pound will depreciate against the dollar.

A short hedge with foreign currency futures

Analysis: total proceeds from the transfer under different scenarios

Call option hedging A US importer has to pay € 62,500 to a German exporter in 60 days. Worst case scenario: DM will appreciate against the US$

Call option hedging

Put option hedging A US exporter has to receive € 62,500 from a German importer in 60 days. Worst case scenario: DM will depreciate against the US$

Put option hedging

Determining whether to buy or sell futures/forward when hedging Method 1: Worst case scenario Method 2: Current spot position Method 3: Anticipated spot transaction

Method 1: Worst case scenario What is the worst that could happen in the spot market? Take a futures position that will be profitable in the worst case scenario for the spot market.

Method 2: Current spot position Determine whether your current spot position is long or short:

Method 3: Anticipated spot transaction What spot transaction will you make when the hedge is terminated? Sell or buy an asset. Do the same today in the futures market