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Foundations of Multinational Financial Management 5 th Edition Alan Shapiro J.Wiley & Sons

Foundations of Multinational Financial Management 5 th Edition Alan Shapiro J.Wiley & Sons. Power Points by Joseph F. Greco, Ph.D. California State University, Fullerton. Currency Futures and Options Markets. Chapter 8. PART I.FUTURES CONTRACTS. I. CURRENCY FUTURES A. Background

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Foundations of Multinational Financial Management 5 th Edition Alan Shapiro J.Wiley & Sons

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  1. Foundations of Multinational Financial Management5th EditionAlan Shapiro J.Wiley & Sons Power Points by Joseph F. Greco, Ph.D. California State University, Fullerton

  2. Currency Futures and Options Markets Chapter 8

  3. PART I.FUTURES CONTRACTS • I. CURRENCY FUTURES • A. Background • 1. Long history • 2. Extremely volatile due to information driven nature • 3. Price Discovery Role • Financial derivatives: they are contracts that derive their value from some underlying asset(stock , bond, currency) • 1.Forwards 2.Futures 3.Options 4.SWAP

  4. FUTURES CONTRACTS • 1972: Chicago Mercantile Exchange(CME芝加哥商品交易所) opens the International Monetary Market (IMM). • Purpose: speculator vs hedger

  5. 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.

  6. FUTURES CONTRACTS • b.Available Futures Currencies/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

  7. 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).

  8. 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保證金. • Initial Margin:當期貨交易開始時需具備的金額 • Maintenance Margin:當低於維持保證金時，必須補足金額至原始保證金的額度

  9. 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 • 平倉(offsetting trade):一買一賣抵銷交易，不用到期交割

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

  11. 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. FUTURES CONTRACTS

  12. CURRENCY OPTIONS PART II

  13. 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.

  14. CURRENCY OPTIONS • Buyers Sellers=Writers Premium Sell Buy Sell Buy PUT CALL

  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.

  16. 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.

  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 • c. Types of Currency Options: • 1.) Calls • 2.) Puts

  19. 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

  20. 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.

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

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

  23. Options Sample Problems • Ford buys a French put option (contract size: FF250,000) 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)?

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