Currency Futures and Options Markets Chapter 8 PART

Currency Futures and Options Markets Chapter 8

PART I. FUTURES CONTRACTS外 幣期貨合約 I. CURRENCY FUTURES外幣期貨合約 A. Background 1. Long history 2. Extremely volatile due to information driven nature 3. Price Discovery Role 2

FUTURES CONTRACTS 1972: Chicago Mercantile Exchange opens the International Monetary Market (IMM). Purpose: 3

FUTURES CONTRACTS 2. IMM provides a. an outlet for hedging currency risk with futures contracts. Definition: contracts written requiring a standard quantity of an available currency at a fixed exchange rate at a set delivery date. 4

FUTURES CONTRACTS b. Available Futures Currencies/Contract Size: 1. ) British pound / 62, 500 2. ) 3. ) 4. ) 5. ) 6. ) 7. ) Canadian dollar /100, 000 Euro / 125, 000 Swiss franc / 125, 000 Japanese yen / 12. 5 million Mexican peso / 500, 000 Australian dollar / 100, 000 5

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

FUTURES CONTRACTS: SAFEGUARDS e. Maximum price movements 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. 7

FUTURES CONTRACTS g. Global futures exchanges: 1. ) 2. ) 3. ) 4. ) 5. ) 6. ) I. M. M. International Monetary Market L. I. F. F. E. London International Financial Futures Exchange C. B. O. T. Chicago Board of Trade S. I. M. E. X. Singapore International Monetary Exchange D. T. B. Deutsche Termin Bourse H. K. F. E. Hong Kong Futures Exchange 8

FUTURES CONTRACTS B. Forward vs. Futures Contracts Basic differences: 1. Trading Locations 2. Regulation 3. Frequency of delivery 4. Size of contract 5. Transaction Costs 6. Quotes 7. Margins 8. Credit risk 13

FUTURES CONTRACTS Advantages of futures: 1. ) Easy liquidation 2. ) Well- organized and stable market. Disadvantages of futures: 1. ) Limited to 7 currencies 2. ) Limited dates of delivery 3. ) Rigid contract sizes. 14

期貨合約術語 1/6 保證金(現在CME稱之為「履約保證」(performance bond))， 原始保證金(performance bond，以前稱之為initial margin)是指要從事交易時帳戶餘額上所需具備的 金額 維持保證金(maintenance performance bond，以前 稱之為maintenance margin) 追繳保證金(performance bond call，以前稱之為 margin call) 15

CURRENCY OPTIONS PART II

CURRENCY OPTIONS I. OPTIONS A. Currency options 1. Offer another method to hedge exchange rate risk. 2. First offered on Philadelphia Exchange (PHLX). 3. Fastest growing segment of the hedge markets. 23

CURRENCY OPTIONS Buyers Sellers=Writers Premium Buy Sell PUT CALL 24

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. 25

CURRENCY OPTIONS 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. 26

CURRENCY OPTIONS 7. Exercise Price a. b. Sometimes known as the strike price. The exchange rate at which the option holder can buy or sell the contracted currency. 27

CURRENCY OPTIONS c. Types of Currency Options: 1. ) Calls 2. ) Puts 28

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 29

CURRENCY OPTIONS 9. What is the premium? - The price of an option that the writer charges the buyer. B. Why Use Currency Options? 1. For the firm hedging foreign exchange risk with Future event is very uncertain gains. 30

CURRENCY OPTIONS 2. For speculators - profit from favorable exchange rate changes. 31

CURRENCY OPTIONS C. Using Forward or Futures Contracts Forward or futures contracts are more suitable for hedging a known amount of foreign currency flow. 32

Options Sample Problems Ford buys a French put option (contract size: FF 250, 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)? 33