© K. Cuthbertson and D. Nitzsche Figures for Chapter 4 CURRENCY FORWARDS AND FUTURES (Financial Engineering : Derivatives and Risk Management)

© K. Cuthbertson and D. Nitzsche Figure 4.1 : Actual FX-forward contract : cash flows t = 0 Time Receive $150 Pay out £100 t = 1 Will receive $150 and pay out £100 at t=1. No ‘own funds’ are used and no cash exchanges hands today (time t = 0) Quoted forward rate : F = 1.5($/£)

© K. Cuthbertson and D. Nitzsche Figure 4.2 : Synthetic FX-forward contract t = 0 Time Receive $150 Pay out £100 t = 1 Note : no ‘own funds’ are used. Using money market and the spot FX rate. Data : r(UK) = 11%, r(US) = 10%, S = ($/£) Create cash flows equivalent to actual forward contract begin by ‘creating’ the cash outflow of £100 at t = 1. Borrow £90.09 at r(UK) = 11% Lend £90.09 x S = $ in the US at r(US) = 10%

© K. Cuthbertson and D. Nitzsche Figure 4.4 : Long one euro futures contract Futures price Profit $1250 -$ Long future F 1 = 1.05 F 2 = 1.03 F 0 = ticks Contract size = Euros 125,000 Tick value = $12.50