7th Edition J.Wiley & Sons Power Points by Joseph F. Greco, Ph.D. California State University, Fullerton 1
CHAPTER 8 CURRENCY FUTURES AND OPTIONS MARKETS
FUTURES CONTRACTS CURRENCY OPTIONS
PART I. FUTURES CONTRACTS I. CURRENCY FUTURES A. Background 1. 1972: Chicago Mercantile Exchange opens International Monetary (IMM)
FUTURES CONTRACTS 2. IMM provides a. an outlet for hedging currency risk with futures contracts. b. Definition of futures contracts: contracts written requiring • a standard quantity of an available currency • at a fixed exchange rate • at a set delivery date.
FUTURES CONTRACTS c. Available Futures Currencies: 1.) British pound 5.) Euro
2.) Canadian dollar 3.) Deutsche mark dollar 4.) Swiss franc
6.) Japanese yen 7.) Australian
FUTURES CONTRACTS d. Standard Contract Sizes: contract sizes differ for each of the 7 available currencies.
Examples: Euro = 125,000 British Pound = 62,500 7
FUTURES CONTRACTS e.
Transaction costs: payment of commission to a trader f. Leverage is high 1.) Initial margin required is relatively low (e.g. less than .02% of sterling contract value). 8
FUTURES CONTRACTS g.
Maximum price movements 1.) Contracts set to a daily price limit restricting maximum daily price movements.
FUTURES CONTRACTS 2.) If limit is reached, a margin call may be necessary to maintain a minimum margin.
FUTURES CONTRACTS h. Global futures exchanges that are competitors to the IMM: 1.) Deutsche Termin Bourse 2.) L.I.F.F.E.London International Futures Exchange
3.) C.B.O.T. Chicago Board of Trade
FUTURES CONTRACTS 4.)
S.I.M.E.X.Singapore International Monetary Exchange
H.K.F.E. Hong Kong Futures Exchange
FUTURES CONTRACTS B. Forward vs. Futures Contracts Basic differences: 1. Trading Locations 6. Settlement Date 2. Regulation 7. Quotes 3. Frequency of 8. Transaction delivery costs 4. Size of contract 9. Margins 5. Delivery dates 10. Credit risk
1.) Limited to 7 currencies 2.) Limited dates of delivery 3.) Rigid contract sizes. 14
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. 15
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.
CURRENCY OPTIONS 5. Types 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. 17
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. 18
CURRENCY OPTIONS 8.
Status of an option a. In-the-money Call: Spot > strike Put: Spot < strike