1 CHAPTER 7 CURRENCY FUTURES AND OPTIONS MARKETS CHAPTER OVERVIEW I.FUTURES CONTRACTS II.CURRENCY OPTIONS.

Slides:

Advertisements

Similar presentations

Copyright© 2003 John Wiley and Sons, Inc. Power Point Slides for: Financial Institutions, Markets, and Money, 8 th Edition Authors: Kidwell, Blackwell,

Advertisements

What is an Option? Definitions: An option is an agreement between two parties that gives the purchaser of the option the right, but not the obligation,

FINC4101 Investment Analysis

Copyright © 2009 Pearson Prentice Hall. All rights reserved. Chapter 8 Foreign Currency Derivatives.

Session 3. Learning objectives After completing this you will have an understanding of 1. Financial derivatives 2. Foreign currency futures 3. Foreign.

 Derivatives are products whose values are derived from one or more, basic underlying variables.  Types of derivatives are many- 1. Forwards 2. Futures.

Chapter Objective: This chapter discusses exchange-traded currency futures contracts, options contracts, and options on currency futures. 6 Chapter Six.

8-1 Lecture #12 Hedging foreign currency risk: Issues outside of China Aaron Smallwood, PhD. UT-Arlington.

Futures and Options on Foreign Exchange Chapter 7 ( )

©2007, The McGraw-Hill Companies, All Rights Reserved Chapter Ten Derivative Securities Markets.

1 Futures and Options on Foreign Exchange Chapter Objective: This chapter discusses exchange-traded currency futures contracts, options contracts, and.

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill /Irwin Chapter Ten Derivative Securities Markets Dr. Ahmed Y Dashti.

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

©2009, The McGraw-Hill Companies, All Rights Reserved 8-1 McGraw-Hill/Irwin Chapter Ten Derivative Securities Markets.

1 Introduction Chapter 1. 2 Chapter Outline 1.1 Exchange-traded markets 1.2 Over-the-counter markets 1.3 Forward contracts 1.4 Futures contracts 1.5 Options.

AN INTRODUCTION TO DERIVATIVE SECURITIES

Spot and Forward Rates, Currency Swaps, Futures and Options

Vicentiu Covrig 1 An introduction to Derivative Instruments An introduction to Derivative Instruments (Chapter 11 Reilly and Norton in the Reading Package)

Currency Futures and Options Markets

AN INTRODUCTION TO DERIVATIVE INSTRUMENTS

Chapter 14 Futures Contracts Futures Contracts Our goal in this chapter is to discuss the basics of futures contracts and how their prices are quoted.

Vicentiu Covrig 1 Options and Futures Options and Futures (Chapter 18 and 19 Hirschey and Nofsinger)

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill /Irwin Chapter Ten Derivative Securities Markets.

OPTIONS, FUTURES, AND OTHER DERIVATIVES Chapter 1 Introduction

Chapter 16 Commodities and Financial Futures. Copyright © 2005 Pearson Addison-Wesley. All rights reserved Commodities and Financial Futures Learning.

CHAPTER 6 CURRENCY FUTURES AND OPTIONS MARKETS. CHAPTER OVERVIEW CHAPTER OVERVIEW I.FUTURES CONTRACTS II.CURRENCY OPTIONS.

1 Multinational Financial Management Alan Shapiro 7 th Edition J.Wiley & Sons Power Points by Joseph F. Greco, Ph.D. California State University, Fullerton.

© K.Cuthbertson, D. Nitzsche1 Version 1/9/2001 FINANCIAL ENGINEERING: DERIVATIVES AND RISK MANAGEMENT (J. Wiley, 2001) K. Cuthbertson and D. Nitzsche LECTURE.

1 Currency Futures A foreign currency futures contract is an alternative to a forward contract.  It calls for future delivery of a standard amount of.

1 Multinational Financial Management Alan Shapiro 10 th Edition John Wiley & Sons, Inc. PowerPoints by Joseph F. Greco, Ph.D. California State University,

Currency Futures and Options Markets Chapter 7. 2 PART I. FUTURES CONTRACTS I.CURRENCY FUTURES A.Background 1.Long history 2.Extremely volatile due to.

Foundations of Multinational Financial Management 5 th Edition Alan Shapiro J.Wiley & Sons Power Points by Joseph F. Greco, Ph.D. California State University,

Foreign Currency Options A foreign currency option is a contract giving the option purchaser (the buyer) –the right, but not the obligation, –to buy.

Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 15 Commodities and Financial Futures.

SWAP Agreements LECTURE 06. SWAPS  Basic meaning of SWAP is “something that is exchanged”  A currency swap refers to a spot sale of a currency combined.

9/19/2015Multinational Corporate Finance Prof. R.A. Michelfelder 1 Outline 6 6. Currency Futures and Options 6.1 Introduction 6.2 Currency Futures

Copyright© 2006 John Wiley & Sons, Inc.1 Power Point Slides for: Financial Institutions, Markets, and Money, 9 th Edition Authors: Kidwell, Blackwell,

International Finance FIN456 ♦ Fall 2012 Michael Dimond.

© 2012 Pearson Education, Inc. All rights reserved The Basics of Futures Contracts Futures (versus forwards) Allow individuals and firms to buy.

Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. 9-0 INTERNATIONAL FINANCIAL MANAGEMENT EUN / RESNICK Third Edition Chapter Objective:

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

Introduction to Options. The Basics of Options  An option is an agreement between two parties, a buyer and a seller.  In the case of futures contract.

Chapter 14 Financial Derivatives. © 2013 Pearson Education, Inc. All rights reserved.14-2 Hedging Engage in a financial transaction that reduces or eliminates.

13-1 Hedging Hedge: engage in a financial transaction that reduces or eliminates risk Basic hedging principle: Hedging risk involves engaging in a financial.

SECTION IV DERIVATIVES. FUTURES AND OPTIONS CONTRACTS RISK MANAGEMENT TOOLS THEY ARE THE AGREEMENTS ON BUYING AND SELLING OF THESE INSTRUMENTS AT THE.

The Currency Futures and Options Markets

Copyright © 2010 Pearson Addison-Wesley. All rights reserved. Chapter 14 Financial Derivatives.

Chapter 9 Futures and Options on Foreign Exchange.

International Finance FINA 5331 Lecture 12: Hedging currency risk… Covered Interest Rate Parity Read: Chapter 7 Aaron Smallwood Ph.D.

Chapter 8 Foreign Currency Derivatives. 8-2 Foreign Currency Derivatives: Learning Objectives Examine how foreign currency futures are quoted, valued,

Accounting 6570 Chapter 6 –Foreign Currency Transactions and Hedging Foreign Exchange Risk.

Chapter 18 Derivatives and Risk Management. Options A right to buy or sell stock –at a specified price (exercise price or "strike" price) –within a specified.

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

International Finance FIN456 Michael Dimond. Michael Dimond School of Business Administration Derivatives in currency exchange Forwards – a “one off”

1 Foreign Currency Derivatives Markets International Financial Management Dr. A. DeMaskey.

1 Derivatives Topic #4. Futures Contracts An agreement to buy or sell an asset at a certain time in the future for a certain price Long and Short positions.

Vicentiu Covrig 1 An introduction to Derivative Instruments An introduction to Derivative Instruments (Chapter 11 Reilly and Norton in the Reading Package)

2011 Examination Q & A (3) Question 3 (a) Show diagrammatically with explanations how inflation affects nominal exchange rate, leaving real exchange rate.

Futures Contracts: Preliminaries A futures contract is like a forward contract: –It specifies that a certain currency will be exchanged for another at.

Introduction to Swaps, Futures and Options CHAPTER 03.

11.1 Options and Swaps LECTURE Aims and Learning Objectives By the end of this session students should be able to: Understand how the market.

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

Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill /Irwin 10-1 Chapter Ten Derivative Securities Markets.

CHAPTER 7 Options Contracts and Currency Futures (Textbook Chapter 8)

5 Chapter Currency Derivatives South-Western/Thomson Learning © 2006.

Chapter 15 Commodities and Financial Futures.

Risk Management with Financial Derivatives

CHAPTER 5 Currency Derivatives © 2000 South-Western College Publishing

CHAPTER 3: Exchange Rate & Currency Derivatives

Foreign Currency Derivatives: Futures and Options

Presentation transcript:

1 CHAPTER 7 CURRENCY FUTURES AND OPTIONS MARKETS CHAPTER OVERVIEW I.FUTURES CONTRACTS II.CURRENCY OPTIONS

2 PART I. FUTURES CONTRACTS I.CURRENCY FUTURES A.Background 1.Long history 2.Extremely volatile due to information driven nature 3.Price Discovery Role

3 FUTURES CONTRACTS B. 1972: Chicago Mercantile Exchange opens the 1.Purpose: provides an outlet for currency speculators and hedgers 2.International Monetary Market (IMM) Board of Directors sets delivery dates

4 FUTURES CONTRACTS C.Futures Contract Definition: contracts written requiring 1. standard quantity of an available currency 2.at a fixed exchange rate 3. at a set delivery date.

5 FUTURES CONTRACTS: 1. British pound 2. Canadian dollar 3. Euro 4. Swiss franc 5. Japanese yen 6. Mexican peso 7. Australian dollar 8.Brazilian real 9.Czech koruna 10.Hungarian florint 11.Norwegian krone 12.Polish zloty 13.Russian ruble 14.South African rand 15.New Zealand $ 16.Swedish krona D.Available in

6 FUTURES CONTRACTS E.Transaction costs: commission payment to a floor trader commission payment to a floor trader F.Leverage is high 1.)Initial margin required is relatively low (less than 2% of contract value).

7 FUTURES CONTRACTS: SAFEGUARDS G.What are the market’s built-in safeguards? 1.Contracts set to a daily price limit restricting maximum daily price movements. 2.If limit is reached, a margin call may be necessary to maintain a minimum margin.

8 FUTURES CONTRACTS: SAFEGUARDS 3.Marking to Market 4. Eliminating default CME may step in to complete the transaction if either side defaults 5. Delivery cancelled CME allows for offsetting transactions cancelling delivery or purchase of the currency

9 FUTURES CONTRACTS H.Global futures exchanges: 1.I.M.M. International Monetary Market 2.L.I.F.F.E.London International Financial Futures Exchange 3.C.B.O.T. Chicago Board of Trade 4. S.I.M.E.X.Singapore International Monetary Exchange 5.D.T.B. Deutsche Termin Bourse 6.H.K.F.E. Hong Kong Futures Exchange

10 FUTURES CONTRACTS 1. Trading Locations 2.Regulation 3. Frequency of delivery 4. Size of contract 5. Transaction Costs 6. Quotes 7. Margins 8. Credit risk I.Forward vs. Futures Contracts Basic differences:

11 FUTURES CONTRACTS Advantages of futures: 1. High leverage(2%) 2. Easy liquidation 3. Well- organized and stable market. Disadvantages of futures: 1. Limited to 7 currencies currencies 2. Limited dates of delivery of delivery 3. Rigid contract sizes. sizes. J. Why would you use them?

PART II CURRENCY OPTIONS

13 Part II. CURRENCY OPTIONS I.OPTIONS A. Currency options 1.offer another product to hedge exchange rate risk. 2.first offered on Philadelphia Exchange (PHLX).

14 CURRENCY OPTIONS B. Definition: a contract from a writer ( the seller) that gives 1.the right not the obligation to the holder (the buyer)to buy or sell 2.a standard amount of an available currency at 3.a fixed exchange rate for a fixed time period.

15 CURRENCY OPTIONS C.Two Types: Based on Exercise Dates 1.American exercise date may occur any time up to the expiration date. 2.European exercise date occurs only at the expiration date and not before.

16 CURRENCY OPTIONS D.Exercise Price (exchange rate) 1. Sometimes known as the strike price. 2.The exchange rate at which the option holder can buy or sell the contracted currency.

17 CURRENCY OPTIONS E.Types of Currency Options 1.Calls give the holder the right to buy a certain amount of currency at a fixed exchange rate. 2.Puts give the holder the right to sell a certain amount of currency at a fixed exchange rate.

18 CURRENCY OPTIONS F.Status of an option 1.In-the-money Call:Spot > strike Put:Spot < strike 2.Out-of-the-money Call:Spot < strike Put:Spot > strike 3.At-the-money Spot = the strike

19 CURRENCY OPTIONS G.What is the premium? 1.the price of an option that the writer charges the buyer 2. consider it a risk premium to the writer

20 CURRENCY OPTIONS H. Why Use Currency Options? 1.For the firm hedging foreign exchange risk with Future event is very uncertain gains. 2.For speculators - profit from favorable exchange rate changes.

21 CURRENCY OPTIONS I. Using Forward or Futures Contracts Forward or futures contracts are more suitable for hedging a known amount of foreign currency flow. Examples: accounts payable/receivables

22 Options Sample Problems Ford buys a Franc put option (contract size: FF250,000) at a premium of $.01/FF. If the exercise price is $.21 and the spot at expiration is $.216, what is Ford’s profit (loss)?

23 SOLUTION REVENUES: Sell at.21 COSTS:If exercised Buy at.216 Premium +.01 Total.226 Loss: If exercised:$4,000 Loss: If not exercised: $2,500 (= the original premium)