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Chapter 3. Derivatives New
Chapter 3. Derivatives New
LEARNING OUTCOMES
Chapter 3 markets.
❖Use forward, future and option contracts to
hedge or speculate
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FORWARD MARKET
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The forward market facilitates the trading of forward ❖The parties are bound by the contract and are
contracts on currencies. A forward contract is an responsible for fulfilling their contractual obligations
agreement between a corporation and a commercial ❖The most common forward contracts are for 30,
bank to exchange a specified amount of a currency 60, 90, 180, and 360 days, although other periods
at a specified exchange rate (called the forward (including longer periods) are available
rate) on a specified date in the future
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Sb: Spot Ask exchange rate Currency 3 months period 6 months period
Deposit Loan Deposit Loan
n: period
EUR (% per year) 3.25 4.25 3.28 4.32
N: number of a period
VND (% per year) 7.2 9 7.8 10.2
R1: loan interest rate of quote currency
R2: deposit interest rate of commodity currency 1. Determine the 3-month forward buying rate to offer customers C
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currency to be exchanged on a specific settlement ❖The risk of partner does not perform the contract
date. ❖Difficult to remove contractual obligations.
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❖Concept
▪ Classification
➢Currency options provide the right to purchase or Currency
sell currencies at specified prices. option
Currency Currency
call option put option
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❖Classification ❖Classification
Currency call option Quyền chọn mua Currency put option Quyền chọn bán
Buyer Seller
Bên mua Bên bán
Bên mua Bên bán
Buyer Seller
• Obligation: Pay option • Right: Receive option • Obligation: Pay option • Right: Receive option
fees. fees. fees. fees.
• Right: Buy a certain • Obligation: Sell a certain • Right: Sell a certain • Obligation: Buy a certain
currency at a specified currency at a specified currency at a specified currency at the price
price price, if the buyer price. determined if the buyer
exercises his rights exercises his right
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➢American style: Allows the option to be exercised ➢ Call option rate is smaller than spot rate =>
at any time until the contract is due. apply Call option
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