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    Currency Futures and Options Markets

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    ARUNABH DAYAL
    The document discusses currency futures and options markets. It describes how the International Monetary Market (IMM) was opened in 1972 to provide a stable market for currency futures contracts. The IMM allows for hedging currency risk through standardized futures contracts that require delivery of a set amount of a currency at a fixed exchange rate on a future date. Currency options offer another way to hedge exchange rate risk and give the buyer the right, but not obligation, to buy or sell a currency at a fixed rate by a specified date. Both futures and options allow market participants to manage foreign exchange risk.

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    Currency Futures and Options Markets

    Uploaded by

    ARUNABH DAYAL
    49 views22 pages
    The document discusses currency futures and options markets. It describes how the International Monetary Market (IMM) was opened in 1972 to provide a stable market for currency futures contracts. The IMM allows for hedging currency risk through standardized futures contracts that require delivery of a set amount of a currency at a fixed exchange rate on a future date. Currency options offer another way to hedge exchange rate risk and give the buyer the right, but not obligation, to buy or sell a currency at a fixed rate by a specified date. Both futures and options allow market participants to manage foreign exchange risk.

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    The document discusses currency futures and options markets. It describes how the International Monetary Market (IMM) was opened in 1972 to provide a stable market for currency futures contracts. The IMM allows for hedging currency risk through standardized futures contracts that require delivery of a set amount of a currency at a fixed exchange rate on a future date. Currency options offer another way to hedge exchange rate risk and give the buyer the right, but not obligation, to buy or sell a currency at a fixed rate by a specified date. Both futures and options allow market participants to manage foreign exchange risk.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    49 views22 pages

    Currency Futures and Options Markets

    Uploaded by

    ARUNABH DAYAL
    The document discusses currency futures and options markets. It describes how the International Monetary Market (IMM) was opened in 1972 to provide a stable market for currency futures contracts. The IMM allows for hedging currency risk through standardized futures contracts that require delivery of a set amount of a currency at a fixed exchange rate on a future date. Currency options offer another way to hedge exchange rate risk and give the buyer the right, but not obligation, to buy or sell a currency at a fixed rate by a specified date. Both futures and options allow market participants to manage foreign exchange risk.

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    Currency Futures and

    Options Markets
    PART I

    Futures Contracts
    FUTURES CONTRACTS

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

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

    B. Forward vs. Futures Contracts


    Basic differences:
    1. Trading Locations6. Quotes
    2. Regulation 7. Margins
    3. Frequency of 8. Credit risk
    delivery
    4. Size of contract
    5. Transaction Costs
    FUTURES CONTRACTS

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

    Currency
    Options
    CURRENCY OPTIONS

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

    Buyers Sellers=Writers

    Buy Sell Buy Sell

    PUT
    CALL
    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. 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.
    6. What is the premium?
    the price of an option that the writer
    charges the buyer.
    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.
    CURRENCY OPTIONS

    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
    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
    CURRENCY OPTIONS

    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.

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