5. Foreign Currency Futures

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "5. Foreign Currency Futures"

Transcription

1 5. Foreign Currency Futures Futures contracts are designed to minimize the problems arising from default risk and to facilitate liquidity in secondary dealing. In the United States, the most important market for foreign currency futures is the International Money Market (IMM) of Chicago, a division of the Chicago Mercantile Exchange. The best way to understand these contracts is to compare them with forward transactions. Like forward contracts, currency futures contracts are, in principle, contracts to deliver a given amount of currency on a given date and at a pre-specified price to be paid later on. Like forward contracts, futures contracts have a zero initial market value: neither the buyer nor the seller has to pay anything when a contract is initiated at the going market rate. However, futures contracts differ from forward contracts in many other respects. 5.1 Currency Futures Markets As we have seen before, forward contracts are held until maturity. At that point, a prespecified amount of currency is delivered at a pre-agreed price. However, only about 5 % of all futures contracts are settled by the physical delivery of foreign exchange between buyer and seller. Most often, buyers and sellers offset their original position prior to delivery date by taking an opposite position. The complete buy/sell or sell/buy is called a round turn. Customers usually pay a commission to their broker to execute a round turn and only a single price is quoted. Organized Markets: Futures are traded on organized exchanges, with specific rules about the terms of the contracts, and with an active secondary market. Futures prices are the result of a centralized, organized, matching of demand and supply. One method of organizing this matching of orders is the open outcry system, where floor members are physically present in a trading pit and auction off their orders by shouting them out: examples include the International Money Market (IMM) in Chicago and the London International Financial Futures Exchange (LIFFE). Another method is to centralize the limit orders in a computerized Public Limit Order Book. A limit order is an order to buy and indicated number of currency units at a price no higher than a given level or to sell an indicated number of currency units at a price no

2 lower than a given level. Brokers sit before their screens, and can add or delete their orders, or fill a limit order posted on the screen. Clearing Corporation: Futures contracts are not initiated directly between clients. Rather, each party has a contract with the futures clearing corporation or clearing house. Consequently, clients need not worry that a specific counterpart in the market will fail to honor an agreement. Moreover, the clearing corporation levies a small tax on all transactions, and thus has reserves that should cover losses from default. Contract Specifications: Exact contract specifications are defined by the exchange on which they are traded. This standardization means that the futures market is not as fragmented by too wide a variety of contracts as in the forward market. Standardization facilitates the emergence of a deep, liquid market. The major features that must be standardized are usually the following. A Specific Contract Size: For example, a CAD contract is for CAD 100,000 (IMM). A Standard Quoting Convention: For example, the American terms (USD/CAD) are used at the IMM. A Standard Maturity Date: Expirations dates are typically the third Wednesdays of March, June, September, or December. A Specified Last Trading Day: Trading stops two business days before the expirations date. Actual delivery takes place on the second business day after the expiration date. Specific Collateral: The purchaser must deposit a sum as an initial margin or collateral. In addition, a maintenance margin is required. The value of the contract is marked to market daily, and all changes in value are paid in cash daily. The amount to be paid is called the variation margin.

3 5.2 Currency Futures Quotations Following is an example of a quote that appear in The Wall Street Journal on Friday 30 July 1993, showing information on yen futures trading for Thursday 29 July 1993 on the International Money Market (IMM) of the Chicago Mercantile Exchange (CME). Lifetime Open Open High Low Settle Change High Low Interest JAPAN YEN (CME) 12.5 MILLION YEN; $ per yen (.00) Sep ,221 Dec ,455 Mr Est vol 28,844; vol Wed 36,595; open int 77,028, + 1,820 The first line shows the size of the contract (12.5 m yen) and states that the prices are stated in USD cents. The June 1993 contract had expired, so the tree contracts being traded on 29 July 1993 are the September and December 1993 contracts, and the March 1994 contracts. Note that there was no trading on the March 1994 contracts for that day. The different headers are: Open: The price at the start of trading on 29 July. High and Low: The highest and lowest transaction prices on 29 July. Settle: The settlement price on 29 July (representative of prices around the close). Change: The change in the settlement price between 28 July and 29 July. Lifetime High and Low: The highest and lowest prices during the life of the contract. Open Interest: The number of outstanding contracts (note: trading is concentrated in the nearest maturity contract). The last line gives an estimate of the volume traded that day and the previous day (Wednesday 27 July 1993). Also shown is the total open interest across the three contracts and the change in open interest relative to the day before.

4 5.3 Marking to Market and Margin Requirements Marking to Market: The futures contract stipulates that the buyer pays the initially agreed-upon amount later on. With a forward contract, later on means at the value date. With a futures contract, however, the exact details of how much is paid at what time depend on the day-to-day movements of the futures price. Consider the following sequence of ex post daily cash flows in a three-day contract (dates 0,1,2,3) to purchase foreign currency: Day: Settlement Price (Settle): Marking to Market: Pay 2 Pay 2 Receive 1 Final Payment for Delivery: Pay 97 The table shows the cash flows to the buyer. The cash flows to the seller are the reverse. Ignoring the time value of money, the cumulative payment from the buyer is equal to =100 units of home currency. Marking to market is the most crucial difference between forward and futures contracts. It means that if an investor defaults, the gain from defaulting is simply the avoidance of a one-day marking to market outflow. All previous losses have already been settled in cash. Compared to a forward contract, the incentive to default on a futures contract is small. For a forward contract, defaulting means that the investor saves the amount lost over the entire life of the contract. The counterpart of this statement is that if an investor fails to make the required margin payment, the loss to the clearing-house is simply the day's price change. Finally, note the futures price for delivery of a currency today must be equal to the relevant spot rate (convergence property): f = S T, T T Margin Requirements: There are two types of margin requirements when trading in futures markets. These are called initial margin and maintenance margin. The idea behind the margin requirements is that the margin should cover virtually all of the one-day risk. This, of course, further reduces both the incentives to default as well as the loss to the clearinghouse if there is default. If one takes a position in the futures market, an initial margin is required. Futures price changes generate either positive or negative cash flows via marking to market. To avoid the cost and inconvenience of frequent but small payments, losses are deducted from the

5 initial margin until a lower bound, the maintenance margin, is reached. At this stage, a margin call is issued, requesting the investor to bring the margin back up to the initial level. This payment is called a variation margin. Example 8.1: The initial margin on a GDP 62,500 contract may be USD 3,000 and the maintenance margin USD 2,400. As long as the investor's loss due to marking to market do not exceed USD 600, the initial equity (USD 3,000) in your account does not go below the maintenance margin of USD 2,400. If her losses were USD 1,000, the value of the equity would drop to USD 2,000, which is below the maintenance margin of USD 2,400. At this point a margin call is issued, and the investor must add a variation margin of USD 1,000 to restore the equity to USD 3, Hedging with Futures Contracts Hedge: The purchase of a contract or tangible good that will rise in value and offset a drop in value of another contract or tangible good. Hedges are undertaken to reduce risk by protecting an owner from loss. Because of its low cost, a hedger may prefer the currency futures market to the forward market. There are, however, problems that arise with hedging in the futures market: The contract size is fixed, and is unlikely to exactly match the position to be hedged. The expiration dates of the futures contract rarely match those for the currency inflows/outflows that the contract is meant to hedge. The choice of underlying assets in the futures market is limited, and the currency one wishes to hedge may not have a futures contract. That is, whereas in the forward market we can tailor the amount, the date, and the currency to a given exposed position, this is not always possible in the futures market. Cross-Hedge: An imperfect hedge is called a cross-hedge when the currencies do not match. Delta-Hedge: An imperfect hedge is called a delta-hedge when the maturities do not match. Delta-Cross-Hedge: An imperfect hedge is called a delta-cross-hedge when both currencies and maturities do not match.

6 The problems of currency and maturity mismatch mean that, at best, only an approximate hedge can be constructed when hedging with futures. The standard rule is to look for a futures position that minimizes the variance of the hedged cash flow. The Perfect Match: Consider the case of US firm in the import/export business. The firm will receive a payment of CAD 500,00 on December 21. It happens that there are CAD 100,000 futures contracts available for a maturity of December 21. To hedge its future payment, the firm sells 5 futures contract of CAD 100,000 with a maturity of December 21. The firm can hedge that amount by engaging in a forward contract to sell CAD 100, Comparing Futures Contracts and Forward Contracts Characteristic Currency Futures Forward Contracts Contract Size: Standardized per currency Any contract size Maturity: Standard fixed maturity Any maturity Location: Floor of organized exchange No specific physical location Pricing: Open outcry in the pit Bid and ask quotes Collateral: Initial margin and marking to market No collateral, but standing relations with bank Settlement: Rare delivery on settlement Normal delivery at settlement Commissions: Single commission covers round trip (purchase and sale) Commissions through bid-ask spread Trading Hours: During exchange hours 24 hours a day Counterparts: Client and clearing house Direct relations Liquidity: Liquid (secondary market) Liquid and large volume

7 Advantages of Using Futures Contracts over Forward Contracts: The default risk of futures contracts is low. As a consequence, relatively unknown players without established reputation can trade in futures market. Because of standardization, futures markets have low transaction costs. Commissions tend to be lower than in forward markets. Futures positions can be closed out with great ease, because of the liquidity in the secondary market. Drawbacks of Using Futures Contracts over Forward Contracts: Standardization of futures contracts makes it difficult to find a perfect hedge. Creditworthy hedgers have to choose between an imperfect but cheap hedge in the futures market and a perfect but expensive hedge in the forward market. Marking to market creates ruin risk for a hedger. The daily marking to market can create severe short-term cash flow problems. Marking to market creates an interest rate risk. The daily cash flows must be financed/deposited in the money markets at interest rates that are not known when the hedge is set up. Futures contracts exist only for a few high-turnover exchange rates. Thus, for most exchange rats, a hedger has to choose between a forward contracts or money market hedges, or a cross-hedge in the futures market. Futures contracts are available only for a number of short maturity. 5.6 Summary Like forward contracts, currency futures contracts are, in principle, contracts to deliver a given amount of currency on a given date and at a pre-specified price to be paid later on. Currency futures contracts are standardized contracts (size and maturity) traded on an organized market between a client and the clearing corporation. Currency futures contracts are subject to marking to market. That is, the daily variations in futures prices give rise to daily cash flows. The inception of these contracts requires an initial margin. In addition, a maintenance margin is required. Hedging refers to the purchase of an asset that rises in value and offset a drop in value of another asset. Hedges are undertaken to reduce risk by protecting an owner from loss.

The Market for Currency Futures

The Market for Currency Futures Overview Chapter 6 Overview Overview : Old & New Tricks How Differ Effect of Marking to Market on Futures Prices Overview Overview : Old & New Tricks How Differ Effect of Marking to Market on Futures Prices

More information

6. Foreign Currency Options

6. Foreign Currency Options 6. Foreign Currency Options So far, we have studied contracts whose payoffs are contingent on the spot rate (foreign currency forward and foreign currency futures). he payoffs from these instruments are

More information

Futures Contract Introduction

Futures Contract Introduction Futures Contract Introduction 1 The first futures exchange market was the Dojima Rice exchange in Japan in the 1730s, to meet the needs of samurai who being paid in rice and after a series of bad harvests

More information

MONEY MARKET FUTURES. FINANCE TRAINER International Money Market Futures / Page 1 of 22

MONEY MARKET FUTURES. FINANCE TRAINER International Money Market Futures / Page 1 of 22 MONEY MARKET FUTURES 1. Conventions and Contract Specifications... 3 2. Main Markets of Money Market Futures... 7 3. Exchange and Clearing House... 8 4. The Margin System... 9 5. Comparison: Money Market

More information

1. HOW DOES FOREIGN EXCHANGE TRADING WORK?

1. HOW DOES FOREIGN EXCHANGE TRADING WORK? XV. Important additional information on forex transactions / risks associated with foreign exchange transactions (also in the context of forward exchange transactions) The following information is given

More information

Manual for SOA Exam FM/CAS Exam 2.

Manual for SOA Exam FM/CAS Exam 2. Manual for SOA Exam FM/CAS Exam 2. Chapter 7. Derivative markets. c 2009. Miguel A. Arcones. All rights reserved. Extract from: Arcones Manual for the SOA Exam FM/CAS Exam 2, Financial Mathematics. Fall

More information

Online Share Trading Currency Futures

Online Share Trading Currency Futures Online Share Trading Currency Futures Wealth warning: Trading Currency Futures can offer significant returns BUT also subject you to significant losses if the market moves against your position. You may,

More information

Chapter 15 OPTIONS ON MONEY MARKET FUTURES

Chapter 15 OPTIONS ON MONEY MARKET FUTURES Page 218 The information in this chapter was last updated in 1993. Since the money market evolves very rapidly, recent developments may have superseded some of the content of this chapter. Chapter 15 OPTIONS

More information

Hedging Foreign Exchange Rate Risk with CME FX Futures Canadian Dollar vs. U.S. Dollar

Hedging Foreign Exchange Rate Risk with CME FX Futures Canadian Dollar vs. U.S. Dollar Hedging Foreign Exchange Rate Risk with CME FX Futures Canadian Dollar vs. U.S. Dollar CME FX futures provide agricultural producers with the liquid, efficient tools to hedge against exchange rate risk

More information

Basic Strategies for Managing U.S. Dollar/Brazilian Real Exchange Rate Risk for Dollar-Denominated Investors. By Ira G. Kawaller Updated May 2003

Basic Strategies for Managing U.S. Dollar/Brazilian Real Exchange Rate Risk for Dollar-Denominated Investors. By Ira G. Kawaller Updated May 2003 Basic Strategies for Managing U.S. Dollar/Brazilian Real Exchange Rate Risk for Dollar-Denominated Investors By Ira G. Kawaller Updated May 2003 Brazilian Real futures and options on futures at Chicago

More information

Currency Futures and Forward Contracts

Currency Futures and Forward Contracts Currency Futures and Forward Contracts by Geneviève Payette presented to Gregor Smith Queen s University January 28, 2005 In the past 30 years exchange rates have become much more volatile and less predictable

More information

DERIVATIVES Presented by Sade Odunaiya Partner, Risk Management Alliance Consulting DERIVATIVES Introduction Forward Rate Agreements FRA Swaps Futures Options Summary INTRODUCTION Financial Market Participants

More information

Online Share Trading Currency Futures

Online Share Trading Currency Futures Online Share Trading Currency Futures pic Currency Futures Introduction Currency futures contracts can be hard-working additions to any investor s or trader s portfolio. They provide a way to hedge the

More information

Foreign Exchange Market INTERNATIONAL FINANCE. Function and Structure of FX Market. Market Characteristics. Market Attributes. Trading in Markets

Foreign Exchange Market INTERNATIONAL FINANCE. Function and Structure of FX Market. Market Characteristics. Market Attributes. Trading in Markets Foreign Exchange Market INTERNATIONAL FINANCE Chapter 5 Encompasses: Conversion of purchasing power across currencies Bank deposits of foreign currency Credit denominated in foreign currency Foreign trade

More information

Learning Curve Interest Rate Futures Contracts Moorad Choudhry

Learning Curve Interest Rate Futures Contracts Moorad Choudhry Learning Curve Interest Rate Futures Contracts Moorad Choudhry YieldCurve.com 2004 Page 1 The market in short-term interest rate derivatives is a large and liquid one, and the instruments involved are

More information

Brief Overview of Futures and Options in Risk Management

Brief Overview of Futures and Options in Risk Management Brief Overview of Futures and Options in Risk Management Basic Definitions: Derivative Security: A security whose value depends on the worth of other basic underlying variables. E.G. Futures, Options,

More information

Currency Derivatives Guide

Currency Derivatives Guide Currency Derivatives Guide What are Futures? In finance, a futures contract (futures) is a standardised contract between two parties to buy or sell a specified asset of standardised quantity and quality

More information

Currency Options. www.m-x.ca

Currency Options. www.m-x.ca Currency Options www.m-x.ca Table of Contents Introduction...3 How currencies are quoted in the spot market...4 How currency options work...6 Underlying currency...6 Trading unit...6 Option premiums...6

More information

MARGIN FOREIGN EXCHANGE AND FOREIGN EXCHANGE OPTIONS

MARGIN FOREIGN EXCHANGE AND FOREIGN EXCHANGE OPTIONS CLIENT SERVICE AGREEMENT Halifax New Zealand Limited Client Service Agreement Product Disclosure Statement for MARGIN FOREIGN EXCHANGE AND FOREIGN EXCHANGE OPTIONS Halifax New Zealand Limited Financial

More information

CME Group 2012 Commodities Trading Challenge. Competition Rules and Procedures

CME Group 2012 Commodities Trading Challenge. Competition Rules and Procedures Competition Rules and Procedures CME Group with assistance from CQG and the University of Houston, is sponsoring a commodities trading competition among colleges and universities. Students will compete

More information

CFA Examination DERIVATIVES - FUTURES Page 1 of 5

CFA Examination DERIVATIVES - FUTURES Page 1 of 5 DERIVATIVES FUTURES A derivative is a contract or agreement whose value depends upon the price of some other (underlying) commodity, security or index. A. FORWARD CONTRACTS Forward: an agreement between

More information

BEAR: A person who believes that the price of a particular security or the market as a whole will go lower.

BEAR: A person who believes that the price of a particular security or the market as a whole will go lower. Trading Terms ARBITRAGE: The simultaneous purchase and sale of identical or equivalent financial instruments in order to benefit from a discrepancy in their price relationship. More generally, it refers

More information

BUSM 411: Derivatives and Fixed Income

BUSM 411: Derivatives and Fixed Income BUSM 411: Derivatives and Fixed Income 2. Forwards, Options, and Hedging This lecture covers the basic derivatives contracts: forwards (and futures), and call and put options. These basic contracts are

More information

Answers to Concepts in Review

Answers to Concepts in Review Answers to Concepts in Review 1. Puts and calls are negotiable options issued in bearer form that allow the holder to sell (put) or buy (call) a stipulated amount of a specific security/financial asset,

More information

J. Gaspar: Adapted from Jeff Madura, International Financial Management

J. Gaspar: Adapted from Jeff Madura, International Financial Management Chapter5 Currency Derivatives J. Gaspar: Adapted from Jeff Madura, International Financial Management 5. 1 Currency Derivatives Currency derivatives are financial instruments whose prices are determined

More information

Introduction to Futures Contracts

Introduction to Futures Contracts Introduction to Futures Contracts September 2010 PREPARED BY Eric Przybylinski Research Analyst Gregory J. Leonberger, FSA Director of Research Abstract Futures contracts are widely utilized throughout

More information

The Market for Foreign Exchange

The Market for Foreign Exchange The Market for Foreign Exchange Chapter Objective: 5 Chapter Five This chapter introduces the institutional framework within which exchange rates are determined. It lays the foundation for much of the

More information

Chapter 2 Mechanics of Futures Markets. Options, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 2012 1

Chapter 2 Mechanics of Futures Markets. Options, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 2012 1 Chapter 2 Mechanics of Futures Markets Copyright John C. Hull 2012 1 Futures Contracts Available on a wide range of assets Exchange traded Specifications need to be defined: What can be delivered, Where

More information

Chapter 4 - The Foreign Exchange Market. Functions of the FX Market

Chapter 4 - The Foreign Exchange Market. Functions of the FX Market Chapter 4 - The Foreign Exchange Market Market Structure and Roles Volume and distribution by Country, Currencies Who trades with Whom Introduction to different kinds of Foreign Exchange contracts Spot,

More information

Chapter 1 - Introduction

Chapter 1 - Introduction Chapter 1 - Introduction Derivative securities Futures contracts Forward contracts Futures and forward markets Comparison of futures and forward contracts Options contracts Options markets Comparison of

More information

Currency Futures trade on the JSE s Currency Derivatives Trading Platform

Currency Futures trade on the JSE s Currency Derivatives Trading Platform Currency Futures trade on the JSE s Currency Derivatives Trading Platform DERIVATIVE MARKET Currency Derivatives Currency Futures www.jse.co.za Johannesburg Stock Exchange Currency Futures & Options trade

More information

CHAPTER 7 FUTURES AND OPTIONS ON FOREIGN EXCHANGE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS

CHAPTER 7 FUTURES AND OPTIONS ON FOREIGN EXCHANGE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS CHAPTER 7 FUTURES AND OPTIONS ON FOREIGN EXCHANGE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Explain the basic differences between the operation of a currency

More information

FORWARD RATE AGREEMENT (FRA)

FORWARD RATE AGREEMENT (FRA) FORWARD RATE AGREEMENT (FRA) 1. Terminology... 3 2. Hedging with FRAs... 9 3. Determination of Forward Interest Rates (FRA)... 11 3.1 The Principle of Forward Interest Rates... 11 3.2 Highest and Lowest

More information

CHAPTER 8 SUGGESTED ANSWERS TO CHAPTER 8 QUESTIONS

CHAPTER 8 SUGGESTED ANSWERS TO CHAPTER 8 QUESTIONS INSTRUCTOR S MANUAL: MULTINATIONAL FINANCIAL MANAGEMENT, 9 TH ED. CHAPTER 8 SUGGESTED ANSWERS TO CHAPTER 8 QUESTIONS. On April, the spot price of the British pound was $.86 and the price of the June futures

More information

When firms need to raise capital, they may issue securities to the public by investment bankers.

When firms need to raise capital, they may issue securities to the public by investment bankers. CHAPTER 3. HOW SECURITIES ARE TRADED When firms need to raise capital, they may issue securities to the public by investment bankers. Primary market is a market for new securities. Secondary market is

More information

Introduction to Equity Derivatives on Nasdaq Dubai NOT TO BE DISTRIUTED TO THIRD PARTIES WITHOUT NASDAQ DUBAI S WRITTEN CONSENT

Introduction to Equity Derivatives on Nasdaq Dubai NOT TO BE DISTRIUTED TO THIRD PARTIES WITHOUT NASDAQ DUBAI S WRITTEN CONSENT Introduction to Equity Derivatives on Nasdaq Dubai NOT TO BE DISTRIUTED TO THIRD PARTIES WITHOUT NASDAQ DUBAI S WRITTEN CONSENT CONTENTS An Exchange with Credentials (Page 3) Introduction to Derivatives»

More information

CHAPTER 22: FUTURES MARKETS

CHAPTER 22: FUTURES MARKETS CHAPTER 22: FUTURES MARKETS PROBLEM SETS 1. There is little hedging or speculative demand for cement futures, since cement prices are fairly stable and predictable. The trading activity necessary to support

More information

FX Options NASDAQ OMX

FX Options NASDAQ OMX FX Options OPTIONS DISCLOSURE For the sake of simplicity, the examples that follow do not take into consideration commissions and other transaction fees, tax considerations, or margin requirements, which

More information

COMEX ON CME GLOBEX GOLD SILVER COPPER ALUMINUM PLATINUM PALLADIUM ZINC

COMEX ON CME GLOBEX GOLD SILVER COPPER ALUMINUM PLATINUM PALLADIUM ZINC COMEX ON CME GLOBEX GOLD SILVER COPPER ALUMINUM PLATINUM PALLADIUM ZINC COMEX ON CME GLOBEX A major expansion of the precious and base metals futures markets on the New York Mercantile Exchange, Inc. makes

More information

3. The Foreign Exchange Market

3. The Foreign Exchange Market 3. The Foreign Exchange Market The foreign exchange market provides the physical and institutional structure through which the money of one country is exchanged for that of another country, the rate of

More information

Reading: Chapter 19. 7. Swaps

Reading: Chapter 19. 7. Swaps Reading: Chapter 19 Chap. 19. Commodities and Financial Futures 1. The mechanics of investing in futures 2. Leverage 3. Hedging 4. The selection of commodity futures contracts 5. The pricing of futures

More information

RISK DISCLOSURE STATEMENT PRODUCT INFORMATION

RISK DISCLOSURE STATEMENT PRODUCT INFORMATION This statement sets out the risks in trading certain products between Newedge Group ( NEWEDGE ) and the client (the Client ). The Client should note that other risks will apply when trading in emerging

More information

Forward and Futures Markets. Class Objectives. Class Objectives

Forward and Futures Markets. Class Objectives. Class Objectives Forward and Futures Markets Peter Ritchken Kenneth Walter Haber Professor of Finance Case Western Reserve University Cleveland, Ohio, 44106 Peter Ritchken Forwards and Futures 1 Class Objectives Buying

More information

Fundamentals of Futures and Options (a summary)

Fundamentals of Futures and Options (a summary) Fundamentals of Futures and Options (a summary) Roger G. Clarke, Harindra de Silva, CFA, and Steven Thorley, CFA Published 2013 by the Research Foundation of CFA Institute Summary prepared by Roger G.

More information

Risk Warning Notice. Introduction

Risk Warning Notice. Introduction First Equity Limited Salisbury House London Wall London EC2M 5QQ Tel 020 7374 2212 Fax 020 7374 2336 www.firstequity.ltd.uk Risk Warning Notice Introduction You should not invest in any investment product

More information

Futures Price d,f $ 0.65 = (1.05) (1.04)

Futures Price d,f $ 0.65 = (1.05) (1.04) 24 e. Currency Futures In a currency futures contract, you enter into a contract to buy a foreign currency at a price fixed today. To see how spot and futures currency prices are related, note that holding

More information

Arbitrage Pricing Perfect market assumptions: No transaction costs; No taxes; No risk of default; no storage costs. Arbitrage pricing: Replicate the p

Arbitrage Pricing Perfect market assumptions: No transaction costs; No taxes; No risk of default; no storage costs. Arbitrage pricing: Replicate the p Fi8000 Valuation of Financial Assets Spring Semester 2010 Dr. Isabel Tkatch Assistant Professor of Finance Forward and Futures Contracts The spot market Forward Contracts Definition Pricing Futures Contracts

More information

The foreign exchange market is global, and it is conducted over-the-counter (OTC)

The foreign exchange market is global, and it is conducted over-the-counter (OTC) FOREIGN EXCHANGE BASICS TERMS USED IN FOREX TRADING: The foreign exchange market is global, and it is conducted over-the-counter (OTC) through the use of electronic trading platforms, or by telephone through

More information

An Introduction to Single Stock Futures. Brett Duncan / Richard Hirsch: Corporate and Investment Banking Kurt Pagel: Online Share Trading

An Introduction to Single Stock Futures. Brett Duncan / Richard Hirsch: Corporate and Investment Banking Kurt Pagel: Online Share Trading An Introduction to Single Stock Futures Brett Duncan / Richard Hirsch: Corporate and Investment Banking Kurt Pagel: Online Share Trading A new age instrument that provides a link between two kinds of financial

More information

Chapter Five: Risk Management and Commodity Markets

Chapter Five: Risk Management and Commodity Markets Chapter Five: Risk Management and Commodity Markets All business firms face risk; agricultural businesses more than most. Temperature and precipitation are largely beyond anyone s control, yet these factors

More information

Commodity Futures and Options

Commodity Futures and Options Understanding Commodity Futures and Options for Producers of Livestock and Livestock Products CIS 1100 The Authors Larry D. Makus, C. Wilson Gray and Neil R. Rimbey* Introduction Risk associated with an

More information

Glossary of Futures Terms

Glossary of Futures Terms NATIONAL FUTURES ASSOCIATION Glossary of Futures Terms An Introduction to the Language of the Futures Industry 1 Glossary of Futures Terms: An Introduction to the Language of the Futures Industry National

More information

Practice set #4 and solutions

Practice set #4 and solutions FIN-465 Derivatives (3 credits) Professor Michel Robe Practice set #4 and solutions To help students with the material, seven practice sets with solutions will be handed out. They will not be graded: the

More information

FTS Real Time Client: Equity Portfolio Rebalancer

FTS Real Time Client: Equity Portfolio Rebalancer FTS Real Time Client: Equity Portfolio Rebalancer Many portfolio management exercises require rebalancing. Examples include Portfolio diversification and asset allocation Indexation Trading strategies

More information

The Danish Foreign-Exchange Market

The Danish Foreign-Exchange Market 33 The Danish Foreign-Exchange Market by Henrik Smed Krabbe, Market Operations Department and Lisbeth Stausholm Pedersen, Economics Department The foreign-exchange market is a market for purchase and sale

More information

Commodity Futures and Options

Commodity Futures and Options Understanding CIS 1089 Commodity Futures and Options Larry D. Makus and Paul E. Patterson for Grain Marketing The Authors: L.D. Makus Professor, Department of Agricultural Economics and Rural Sociology,

More information

ICE Futures U.S., Inc.

ICE Futures U.S., Inc. ICE Futures U.S., Inc. ICE FUTURES EURO INDEX* Effective with the close of business May 20, 2011 all Euro Index Futures and Option Contracts will no longer be listed for trading. TABLE OF CONTENTS Rule

More information

A guide to managing foreign exchange risk

A guide to managing foreign exchange risk A guide to managing foreign exchange risk CPA Australia Ltd ( CPA Australia ) is one of the world s largest accounting bodies with more than 122,000 members of the financial, accounting and business profession

More information

TMX TRADING SIMULATOR QUICK GUIDE. Reshaping Canada s Equities Trading Landscape

TMX TRADING SIMULATOR QUICK GUIDE. Reshaping Canada s Equities Trading Landscape TMX TRADING SIMULATOR QUICK GUIDE Reshaping Canada s Equities Trading Landscape OCTOBER 2014 Markets Hours All market data in the simulator is delayed by 15 minutes (except in special situations as the

More information

Chapter 14 MONEY MARKET FUTURES

Chapter 14 MONEY MARKET FUTURES Page 188 The information in this chapter was last updated in 1993. Since the money market evolves very rapidly, recent developments may have superseded some of the content of this chapter. Chapter 14 MONEY

More information

BOND FUTURES. 1. Terminology... 2 2. Application... 11. FINANCE TRAINER International Bond Futures / Page 1 of 12

BOND FUTURES. 1. Terminology... 2 2. Application... 11. FINANCE TRAINER International Bond Futures / Page 1 of 12 BOND FUTURES 1. Terminology... 2 2. Application... 11 FINANCE TRAINER International Bond Futures / Page 1 of 12 1. Terminology A future is a contract to either sell or buy a certain underlying on a specified

More information

Derivative Users Traders of derivatives can be categorized as hedgers, speculators, or arbitrageurs.

Derivative Users Traders of derivatives can be categorized as hedgers, speculators, or arbitrageurs. OPTIONS THEORY Introduction The Financial Manager must be knowledgeable about derivatives in order to manage the price risk inherent in financial transactions. Price risk refers to the possibility of loss

More information

OUTRIGHTS / FX SWAPS. FINANCE TRAINER International Outrights / FX swaps / Page 1 of 43

OUTRIGHTS / FX SWAPS. FINANCE TRAINER International Outrights / FX swaps / Page 1 of 43 OUTRIGHTS / FX SWAPS 1. FX Forward Outrights... 2 1.1 Conventions and Terminology... 2 1.2 Computing Outright Rates... 3 1.3 Quotation of Outright Rates... 7 1.4 Cross Rates of Outrights... 14 1.5 Time

More information

FIXED-INCOME SECURITIES. Chapter 11. Forwards and Futures

FIXED-INCOME SECURITIES. Chapter 11. Forwards and Futures FIXED-INCOME SECURITIES Chapter 11 Forwards and Futures Outline Futures and Forwards Types of Contracts Trading Mechanics Trading Strategies Futures Pricing Uses of Futures Futures and Forwards Forward

More information

Eurodollar Futures, and Forwards

Eurodollar Futures, and Forwards 5 Eurodollar Futures, and Forwards In this chapter we will learn about Eurodollar Deposits Eurodollar Futures Contracts, Hedging strategies using ED Futures, Forward Rate Agreements, Pricing FRAs. Hedging

More information

11 Option. Payoffs and Option Strategies. Answers to Questions and Problems

11 Option. Payoffs and Option Strategies. Answers to Questions and Problems 11 Option Payoffs and Option Strategies Answers to Questions and Problems 1. Consider a call option with an exercise price of $80 and a cost of $5. Graph the profits and losses at expiration for various

More information

Liquidity in U.S. Treasury spot and futures markets

Liquidity in U.S. Treasury spot and futures markets Liquidity in U.S. Treasury spot and futures markets Michael Fleming and Asani Sarkar* Federal Reserve Bank of New York 33 Liberty Street New York, NY 10045 (212) 720-6372 (Fleming) (212) 720-8943 (Sarkar)

More information

INTRODUCTION TO COTTON FUTURES Blake K. Bennett Extension Economist/Management Texas Cooperative Extension, The Texas A&M University System

INTRODUCTION TO COTTON FUTURES Blake K. Bennett Extension Economist/Management Texas Cooperative Extension, The Texas A&M University System INTRODUCTION TO COTTON FUTURES Blake K. Bennett Extension Economist/Management Texas Cooperative Extension, The Texas A&M University System Introduction For well over a century, industry representatives

More information

Introduction, Forwards and Futures

Introduction, Forwards and Futures Introduction, Forwards and Futures Liuren Wu Zicklin School of Business, Baruch College Fall, 2007 (Hull chapters: 1,2,3,5) Liuren Wu Introduction, Forwards & Futures Option Pricing, Fall, 2007 1 / 35

More information

RISK DISCLOSURE STATEMENT FOR SECURITY FUTURES CONTRACTS

RISK DISCLOSURE STATEMENT FOR SECURITY FUTURES CONTRACTS RISK DISCLOSURE STATEMENT FOR SECURITY FUTURES CONTRACTS This disclosure statement discusses the characteristics and risks of standardized security futures contracts traded on regulated U.S. exchanges.

More information

CME Dairy Markets. USDA Dairy Industry Advisory Committee June 3, 2010. Paul E. Peterson Director, Commodity Research & Product Development

CME Dairy Markets. USDA Dairy Industry Advisory Committee June 3, 2010. Paul E. Peterson Director, Commodity Research & Product Development CME Dairy Markets USDA Dairy Industry Advisory Committee June 3, 2010 Paul E. Peterson Director, Commodity Research & Product Development Brief History of CME Group Began as Chicago Butter & Egg Board

More information

Learning Curve Using Bond Futures Contracts for Trading and Hedging Moorad Choudhry

Learning Curve Using Bond Futures Contracts for Trading and Hedging Moorad Choudhry Learning Curve Using Bond Futures Contracts for Trading and Hedging Moorad Choudhry YieldCurve.com 2004 Page 1 A widely used risk management instrument in the debt capital markets is the government bond

More information

Advanced forms of currency swaps

Advanced forms of currency swaps Advanced forms of currency swaps Basis swaps Basis swaps involve swapping one floating index rate for another. Banks may need to use basis swaps to arrange a currency swap for the customers. Example A

More information

CURRENCY FUTURES IN INDIA WITH SPECIAL REFERENCE TO CURRENCY FUTURES TRADED AT NSE

CURRENCY FUTURES IN INDIA WITH SPECIAL REFERENCE TO CURRENCY FUTURES TRADED AT NSE CURRENCY FUTURES IN INDIA WITH SPECIAL REFERENCE TO CURRENCY FUTURES TRADED AT NSE Vinayak R. Gramopadhye Assistant professor, ASM s Institute of International Business and Research, Pimpri, Pune-18 Abstract

More information

An introduction to the foreign exchange market Moorad Choudhry September 2002

An introduction to the foreign exchange market Moorad Choudhry September 2002 An introduction to the foreign exchange market Moorad Choudhry September 2002 The market in foreign exchange is an excellent example of a liquid, transparent and immediate global financial market. Rates

More information

Learning Curve Forward Rate Agreements Anuk Teasdale

Learning Curve Forward Rate Agreements Anuk Teasdale Learning Curve Forward Rate Agreements Anuk Teasdale YieldCurve.com 2004 Page 1 In this article we review the forward rate agreement. Money market derivatives are priced on the basis of the forward rate,

More information

Clearing and settlement of exchange traded derivatives

Clearing and settlement of exchange traded derivatives Clearing and settlement of exchange traded derivatives by John W. McPartland, consultant, Financial Markets Group Derivatives are a class of financial instruments that derive their value from some underlying

More information

A new landmark in trading

A new landmark in trading A new landmark in trading DERIVATIVES MARKET Equity Derivatives Dividend Futures www.jse.co.za Johannesburg Stock Exchange The JSE in collaboration with Deutsche Bank and Investec Capital Markets is launching

More information

Virtual Stock Market Game Glossary

Virtual Stock Market Game Glossary Virtual Stock Market Game Glossary American Stock Exchange-AMEX An open auction market similar to the NYSE where buyers and sellers compete in a centralized marketplace. The AMEX typically lists small

More information

Hedging Borrowing Costs with Eurodollar Futures

Hedging Borrowing Costs with Eurodollar Futures Hedging Borrowing Costs with Eurodollar Futures DTN/The Progressive Farmer 2010 Ag Summit December 9, 2010 James Boudreault, CFA Financial Research & Product Development CME Group Agenda 1. Introduction

More information

OPTIONS ON SHORT-TERM INTEREST RATE FUTURES*

OPTIONS ON SHORT-TERM INTEREST RATE FUTURES* OPTIONS ON SHORT-TERM INTEREST RATE FUTURES* Anatoli Kuprianov Options are contracts that give their owners the right, but not the obligation, to buy or sell a specified item at a set price on or before

More information

INTEREST RATE SWAP (IRS)

INTEREST RATE SWAP (IRS) INTEREST RATE SWAP (IRS) 1. Interest Rate Swap (IRS)... 4 1.1 Terminology... 4 1.2 Application... 11 1.3 EONIA Swap... 19 1.4 Pricing and Mark to Market Revaluation of IRS... 22 2. Cross Currency Swap...

More information

INTRODUCTION TO OPTIONS MARKETS QUESTIONS

INTRODUCTION TO OPTIONS MARKETS QUESTIONS INTRODUCTION TO OPTIONS MARKETS QUESTIONS 1. What is the difference between a put option and a call option? 2. What is the difference between an American option and a European option? 3. Why does an option

More information

This act of setting a price today for a transaction in the future, hedging. hedge currency exposure, short long long hedge short hedge Hedgers

This act of setting a price today for a transaction in the future, hedging. hedge currency exposure, short long long hedge short hedge Hedgers Section 7.3 and Section 4.5 Oct. 7, 2002 William Pugh 7.3 Example of a forward contract: In May, a crude oil producer gets together with a refiner to agree on a price for crude oil. This price is for crude

More information

PROFITEERING IN THE GLOBAL FOREX MARKET. -Presentation by R.K.Gurumurthy -Treasurer, Bank One Ltd

PROFITEERING IN THE GLOBAL FOREX MARKET. -Presentation by R.K.Gurumurthy -Treasurer, Bank One Ltd PROFITEERING IN THE GLOBAL FOREX MARKET -Presentation by R.K.Gurumurthy -Treasurer, Bank One Ltd The story of a successful trader 2 The story of a successful trader trader 3 The story of a successful trader

More information

Delivery options. Originally, delivery options refer to the options available to the seller of a bond

Delivery options. Originally, delivery options refer to the options available to the seller of a bond Delivery options Originally, delivery options refer to the options available to the seller of a bond futures contract, including the quality option, the timing option, and the wild card option. Delivery

More information

International Financial Management. Prerequisites

International Financial Management. Prerequisites International Financial Management Prerequisites 1. The quoted interest rate is 5% p.a. What is the effective interest rate for 6 months if the quoted interest rate is a) simple, b) annually compounded,

More information

XIV. Additional risk information on forward transactions in CFDs

XIV. Additional risk information on forward transactions in CFDs XIV. Additional risk information on forward transactions in CFDs The following information is given in addition to the general risks associated with forward transactions. Please read the following information

More information

Manual for SOA Exam FM/CAS Exam 2.

Manual for SOA Exam FM/CAS Exam 2. Manual for SOA Exam FM/CAS Exam 2. Chapter 7. Derivatives markets. c 2009. Miguel A. Arcones. All rights reserved. Extract from: Arcones Manual for the SOA Exam FM/CAS Exam 2, Financial Mathematics. Fall

More information

An Introduction to. CME Foreign Exchange Products

An Introduction to. CME Foreign Exchange Products An Introduction to CME Foreign Exchange Products What Are Futures and Options? Futures contracts are standardized, legally binding agreements to buy or sell a specific product or financial instrument in

More information

The mark-to-market amounts on each trade cleared on that day, from trade price to that day s end-of-day settlement price, plus

The mark-to-market amounts on each trade cleared on that day, from trade price to that day s end-of-day settlement price, plus Money Calculations for CME-cleared Futures and Options Updated June 11, 2015 Variation calculations for futures For futures, mark-to-market amounts are called settlement variation, and are banked in cash

More information

Chapter 5: Foreign Currency Options. Definitions

Chapter 5: Foreign Currency Options. Definitions Chapter 5: Foreign Currency Options Overview 1. Definitions 2. Markets for Options 3. Speculation with Options 4. Option Pricing and Valuation (as time permits.) Suggested Problems & Exercises: All 1 de

More information

CHAPTER 12 CHAPTER 12 FOREIGN EXCHANGE

CHAPTER 12 CHAPTER 12 FOREIGN EXCHANGE CHAPTER 12 CHAPTER 12 FOREIGN EXCHANGE CHAPTER OVERVIEW This chapter discusses the nature and operation of the foreign exchange market. The chapter begins by describing the foreign exchange market and

More information

Single Stock Futures ( SSF ) Simple and constant gearing

Single Stock Futures ( SSF ) Simple and constant gearing Single Stock Futures ( SSF ) Simple and constant gearing 1 Content Situation 3 Simple geared share trading simple constant gearing single stock futures Solution 4 What are single stock futures? 5 Gearing

More information

June 2008 Supplement to Characteristics and Risks of Standardized Options

June 2008 Supplement to Characteristics and Risks of Standardized Options June 2008 Supplement to Characteristics and Risks of Standardized Options This supplement supersedes and replaces the April 2008 Supplement to the booklet entitled Characteristics and Risks of Standardized

More information

RISKS DISCLOSURE STATEMENT

RISKS DISCLOSURE STATEMENT RISKS DISCLOSURE STATEMENT You should note that there are significant risks inherent in investing in certain financial instruments and in certain markets. Investment in derivatives, futures, options and

More information

Powerful tools for investing, speculating or hedging

Powerful tools for investing, speculating or hedging Powerful tools for investing, speculating or hedging DERIVATIVE MARKET Equity Derivatives Single Stock Futures www.jse.co.za Johannesburg Stock Exchange Single Stock Futures are powerful tools for investing,

More information

Reference Manual Currency Options

Reference Manual Currency Options Reference Manual Currency Options TMX Group Equities Toronto Stock Exchange TSX Venture Exchange TMX Select Equicom Derivatives Montréal Exchange CDCC Montréal Climate Exchange Fixed Income Shorcan Energy

More information

DERIVATIVE ADDITIONAL INFORMATION

DERIVATIVE ADDITIONAL INFORMATION DERIVATIVE ADDITIONAL INFORMATION I. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES A. Definitions and Concepts 1. Derivative Instrument A "derivative instrument" is a financial instrument that "derives"

More information

Credit Event Auction Primer

Credit Event Auction Primer Credit Event Auction Primer This primer is provided for informational purposes only. Each auction is governed by the Auction Settlement Terms posted on www.isda.org/credit. For any questions about this

More information