1. Currency Futures and Options Markets
CHAPTER 8
Currency Futures and Options Markets

2. PART I
Futures Contracts

3. FUTURES CONTRACTS I. CURRENCY FUTURES A. Market History: 1. Background
a. Long history
b. Extremely volatile due to their information driven nature
c. The market plays a Price Discovery Role for other financial markets such as the cash markets

4. FUTURES CONTRACTS B. International Monetary Market (IMM) 1972:
opened by the Chicago Mercantile Exchange
Purpose:
to provide a stable market for the exchange of currency futures.

5. FUTURES CONTRACTS 2. IMM provides a. an outlet for hedging currency
risk with futures contracts.
Definition of a Futures Contract:
contracts written requiring a standard quantity of an available currency at a fixed exchange rate at a set delivery date.

6. Currency/ Contract Size:
FUTURES CONTRACTS
b. Available Futures Contracts
Currency/ Contract Size:
1.) British pound / 62,500
2.) Canadian dollar /100,000
3.) Euro / 125,000
4.) Swiss franc / 125,000
5.) Japanese yen / 12.5 million
6.) Mexican peso / 500,000
7.) Australian dollar / 100,000

7. FUTURES CONTRACTS c. Transaction costs: d. Leverage is high
in the form of a commission payment to a floor trader
d. Leverage is high
1.) Initial margin required is
relatively low (less than 2% of
contract value).

8. FUTURES CONTRACTS: SAFEGUARDS
e. Maximum price movement rules:
Contracts set daily to a price
limit that restricts maximum
daily upward and downward movements.

9. FUTURES CONTRACTS: SAFEGUARDS
f. Maintenance Margins:
When the account balance falls below the maintenance margin, a margin call may be necessary to maintain the minimum balance.

10. FUTURES CONTRACTS g. 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

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

12. FUTURES CONTRACTS Disadvantages of futures: Advantages of futures:
1.) Limited to 7
currencies
2.) Limited dates
of delivery
3.) Rigid contract
sizes.
Advantages of futures:
1.) Easy liquidation
2.) Well- organized and stable market.

13. PART II
Currency Options

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

15. 3. HOW CURRENCY OPTIONS ARE PURCHASED
Premium
Buyers Sellers=Writers
Buy
Sell
Buy
Sell
PUT
CALL

16. CURRENCY OPTIONS 4. Definition:
a contract from a writer ( the seller) that gives the right not the obligation to the holder (the buyer) to buy or sell a standard amount of an available currency at a fixed exchange rate for a fixed time period.

17. CURRENCY OPTIONS a. American exercise date may occur any
5. Expiration Dates of Currency Options:
a. American
exercise date may occur any
time up to the expiration date.
b. European
exercise date occurs only at the
expiration date and not before.

18. the price of an option that the writer charges the buyer.
6. What is the premium?
the price of an option that the writer charges the buyer.

19. CURRENCY OPTIONS 7. Exercise Price a. Sometimes known as the
strike price.
b. The exchange rate at which the option holder can buy or sell the contracted currency.

20. c. Types of Currency Options:
1.) Calls – give the owner the right to buy the currency
2.) Puts – give the owner the right to sell the currency

21. CURRENCY OPTIONS 8. Status of an option a. In-the-money
Call: Spot > strike
Put: Spot < strike
b. Out-of-the-money
Call: Spot < strike
Put: Spot > strike
c. At-the-money
Spot = the strike

22. 9. Why Use Currency Options?
1. For the firm hedging foreign
exchange risk when a future event is very uncertain.
2. For speculators
who profit from favorable exchange rate changes.