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CHAPTER 6 Chapter 5 - Currency Futures and Forwards
CHAPTER 6 Chapter 5 - Currency Futures and Forwards
Person to person
Forward contract,
are private deals between two individuals who can sign any type of
contract they agree on.
Currency Futures Markets
Participants (speculators, importers,
exporters, companies with foreign currency
assets and liabilities, and bankers)
Currency Futures Markets
Assume on Feb 10th, a futures contract on $20,000 with a
march settlement date is priced at 0.80 in the xx market.
Firm A buys the contract
Firm B sells the contract
On Mar 10th :
The buyer (A) of the contract will receive
The seller (B) of the contract will receive
Currency Futures Market (5)
A U.S.-based MNC has agreed to import raw materials
from Canada. The MNC invoices for these goods in
Canadian dollars and the Canadian dollar will appreciate
in the near future.
April 4 June 17
1. Expect to receive 2. Receive 500,000 pesos
500,000 pesos. as expected.
Contract to sell
500,000 pesos @ 3. Sell the pesos at the
.056/peso on locked-in rate.
June 17.
For use with International Financial Management, 3e
Jeff Madura and Roland Fox 9781408079812
Cengage Learning EMEA 2014
Currency Futures Market (5)
MNCs may purchase currency futures to hedge their
foreign currency payables,
or sell currency futures to hedge their receivables.
April 4 June 17
1. Needs to pay 2. Buys 500,000 pesos as
500,000 pesos. at .056/peso
Contract to buy 3. pays the pesos at the
500,000 pesos @ payment term
.056/peso on June
17.
For use with International Financial Management, 3e
Jeff Madura and Roland Fox 9781408079812
Cengage Learning EMEA 2014
Currency Futures Market (4)
Speculators often sell currency futures
when they expect the underlying currency
to depreciate, and vice versa.
April 4 June 17
1. Contract to sell 2. Buy 500,000 pesos @
500,000 pesos .050/peso (25,000)
@ .056/peso from the spot market.
(28,000) on
June 17.
3. Sell the pesos to fulfill
contract.
Gain = 3,000.
Gains and losses are settled on daily basis by the clearing house to
ensure creditworthiness
Forward Market (1)
A forward contract is an agreement between a firm
and a commercial bank to exchange a specified
amount of a currency at a specified exchange rate
(called the forward rate) on a specified date in the
future.
F = S (1 + p )
F exhibits a discount when p < 0.
F S 360
annualized p =
S n
= 0.59 0.60 360 = .017%
0.60 90
Clearinghouse assumes
No clearinghouses present
responsibility for payment
6 between the parties in a Forward
defaults and are responsible
contract.
for paying the other party.
Comparison of the Forward & Futures
Markets (1)
Future contracts Forward contracts