Futures and Options on Foreign Exchange.ppt

INTERNATIONAL
FINANCIAL
MANAGEMENT
EUN / RESNICK
Fourth Edition
INTERNATIONAL
FINANCIAL
MANAGEMENT
EUN / RESNICK
Fourth Edition
Chapter Objective:
This chapter discusses exchange-traded currency futures contracts, options contracts, and options on currency futures.
7
Chapter Seven
Futures and Options on Foreign Exchange
Chapter Outline
Futures Contracts: Preliminaries
Currency Futures Markets
Basic Currency Futures Relationships
Eurodollar Interest Rate Futures Contracts
Options Contracts: Preliminaries
Currency Options Markets
Currency Futures Options
Chapter Outline (continued)
Basic Option Pricing Relationships at Expiry
American Option Pricing Relationships
European Option Pricing Relationships
Binomial Option Pricing Model
European Option Pricing Model
Empirical Tests of Currency Option Models
Futures Contracts: Preliminaries
A futures contract is like a forward contract:
It specifies that a certain currency will be exchanged for another at a specified time in the future at prices specified today.
A futures contract is different from a forward contract:
Futures are standardized contracts trading anized exchanges with daily resettlement through a clearinghouse.
Futures Contracts: Preliminaries
Standardizing Features:
Contract Size
Delivery Month
Daily resettlement
Initial performance bond (about 2 percent of contract value, cash or T-bills held in a street name at your brokerage).
Daily Resettlement: An Example
Consider a long position in the CME Euro/. Dollar contract.
It is written on €125,000 and quoted in $ per €.
The strike price is $ the maturity is 3 months.
At initiation of the contract, the long posts an initial performance bond of $6,500.
The maintenance performance bond is $4,000.
Daily Resettlement: An Example
Recall that an investor with a long position gains from increases in the price of the underlying asset.
Our investor has agreed to BUY €125,000 at $ per euro in three months time.
With a forward contract, at the