1、Irwin/McGraw-Hill Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 9-0 10 The Currency Derivatives Market (Chapter 7) Irwin/McGraw-Hill Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 9-1 Essential Reading P172-181 Irwin/McGraw-Hill Copyright 2001 by The
2、McGraw-Hill Companies, Inc. All rights reserved. 9-2 Currency Derivative lCurrency Forward lCurrency Future lCurrency Options Irwin/McGraw-Hill Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 9-3 Forward Contract lA forward contract is an agreement between a corporation and a
3、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. Irwin/McGraw-Hill Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 9-4 Forward Contract lWhen a firm anticipate future need or
4、future receipt of a foreign currency, they can set up forward contracts to lock in the exchange rate, hedge the risk. Irwin/McGraw-Hill Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 9-5 Forward Market lForward contracts are used to reduce the risk that foreign exchange rate
5、change will adversely affect transactions that will be settled in the future. Eg. Assume an American car dealer expects to import ten Jaguar motor cars in 90 days from now. The Jaguar Motor car company quotes a price for ten cars at 335,570.The current spot rate is $1.49/ .And the forward rate quote
6、d for 90 days is $1.4867/ . How will the company hedge the risk? Irwin/McGraw-Hill Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 9-6 Forward Contract (1)If change GBP into USD at spot rate, the company has to pay: 335,570 x1.49=$500,000 (2): The importer can buy 335,570 forw
7、ard for 90 days: 335,570 x1.4867=$498,892 In 90 dayss time, the importer has to deliver $498,892 (3)Suppose the pound appreciates to $1.60 during the 90 days, the cars would cost the company the following amount: 1.60 x335,570=537,000 The company has saved more than $1,000 on the original contract t
8、o avoide a loss of $37,000. Irwin/McGraw-Hill Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 9-7 Forward Contract Example: XYZ company, a US manufacturer receives a purchase order from a customer in England on Jan.10th. The invoice is 50,000 and payment is due on June 10th. T
9、he current spot rate is $1.5530, and the forward rate is $1.5450 for six months. If change at spot rate: 1.5530 x50,000=77,650 The firm will sell 50,000 for a maturity window of June 10th through July 9th: 50,000 x1.5450=$77,250 Irwin/McGraw-Hill Copyright 2001 by The McGraw-Hill Companies, Inc. All
10、 rights reserved. 9-8 lA non-deliverable forward contract (NDF) is a forward contract whereby there is no actual exchange of currencies. Instead, a net payment is made by one party to the other based on the contracted rate and the market rate on the day of settlement. lAlthough NDFs do not involve a
11、ctual delivery, they can effectively hedge expected foreign currency cash flows. Forward Market Irwin/McGraw-Hill Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 9-9 Forward Market Jackson company determines as of April 1 that it will need 100 million Chilean pesos to purchase
12、 supplies on July 1. It can buy an NDF with a local bank. Specifically the NDF contains the following information: Buy 100 million Chilean pesos Settlement date: July 1 Reference index: Chilean pesos closing exchange rate (in dollars) quoted by Chiles central bank in 90 days. Assume the current spot
13、 rate is $0.0020, the firm may need $200,000 Irwin/McGraw-Hill Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 9-10 Forward Market Scenario 1 On July 1, the peso value increased to $0.0023, the value of the position is 0.0023x100million=230,000. Since the value of NDF position
14、 is $30,000 higher that when the agreement is made, Jackson will receive a payment of $30,000 from the bank. lSince the spot rate increased, Jackson will have to pay $30,000 more than on April 1st. However, it will receive $30,000 due to NDF. Thus, the risk is hedged. Irwin/McGraw-Hill Copyright 200
15、1 by The McGraw-Hill Companies, Inc. All rights reserved. 9-11 Non-deliverable Forward Contract Scenario 2 If the peso has depreciated to $0.0018, Jacksons position in its NDF will value 0.0018x100million=180,000. Jackson would own the bank $20,000 at that time. However, Jackson would pay $20,000 le
16、ss on spot that if it had paid fro them on April 1. Thus, an offsetting effect would also occur. Irwin/McGraw-Hill Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 9-12 Futures Contracts: Preliminaries lA futures contract is like a forward contract: nIt specifies that a certain
17、 currency will be exchanged for another at a specified time in the future at prices specified today. lA futures contract is different from a forward contract: nFutures are standardized contracts trading on organized exchanges with daily resettlement through a clearinghouse. Irwin/McGraw-Hill Copyrig
18、ht 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 9-13 Currency Future Markets lIn America nChicago Mercantile Exchange (CME) nThe Philadelphia Board of Trade (PBOT) nThe MidAmerica commodities Exchange lIn Asia nThe Tokyo International Financial Futures Exchange nSingapore Internation
19、al Monetary Exchange (SIMEX) lIn Europe nThe London International Financial Futures Exchange lSome are traded on automated trading systems( eg. GLOBEX) or over the counter. Irwin/McGraw-Hill Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 9-14 Futures Contracts lStandardizing
20、Features: nContract Size nDelivery Month nDaily resettlement Irwin/McGraw-Hill Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 9-15 Future Contracts Standard Size Currency Unit per contract Australian dollar 100,000 British pound 62,500 Canadian dollar 100,000 Euro 125,000 Jap
21、anese Yen 12,500,000 Irwin/McGraw-Hill Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 9-16 Future Contracts lDelivery month: lIn the Chicago mercantile exchange: nExpiry cycle: March, June, September, December. nDelivery date :3rd Wednesday of delivery month. nLast trading da
22、y is the second business day preceding the delivery day. Irwin/McGraw-Hill Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 9-17 Forward MarketsFutures Markets Contract sizeCustomized.Standardized. Delivery dateCustomized.Standardized. ParticipantsBanks, brokers,Banks, brokers,
23、 MNCs. PublicMNCs. Qualified speculation notpublic speculation encouraged.encouraged. SecuritySmall security depositdeposit required. credit lines needed. Currency Futures Market Irwin/McGraw-Hill Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 9-18 ClearingHandled byHandled b
24、y operationindividual banksexchange nthe time to expiration date is longer; and nthe variability of the currency is greater. Currency Call Options Irwin/McGraw-Hill Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 9-36 lFirms with open positions in foreign currencies may use cu
25、rrency call options to cover those positions. lThey may purchase currency call options nto hedge future payables; nto hedge potential expenses when bidding on projects; and nto hedge potential costs when attempting to acquire other firms. Currency Call Options Irwin/McGraw-Hill Copyright 2001 by The
26、 McGraw-Hill Companies, Inc. All rights reserved. 9-37 lSpeculators who expect a foreign currency to appreciate can buy call options on that currency. nProfit =selling price buying (strike) price option premium Currency Call Options Irwin/McGraw-Hill Copyright 2001 by The McGraw-Hill Companies, Inc.
27、 All rights reserved. 9-38 Currency Call Option lJim is a speculator who buys a British pound call option with a strike price of $1.40 and a December settlement date. The current spot rate as of that date is about $1.39. Jim pays a premium of $0.012 per unit for the call option. Assume there are no
28、brokerage fees. Just before the expiration date, the spot rate of British pounds reaches $1.41. At this time, Jim exercise the call option and then immediately sells the pounds at the spot rate. Determine Jims profit or loss. Irwin/McGraw-Hill Copyright 2001 by The McGraw-Hill Companies, Inc. All ri
29、ghts reserved. 9-39 Currency Call Option Per unit Per contract Selling price $1.41 $44,063($1.41x31,250) -Purchase price -1.40 -43,750($1.40 x31,250) -Premium -0.012 -375($0.012x31,250) =Net profit -62(0.012x31,250) Irwin/McGraw-Hill Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reser
30、ved. 9-40 lPut option premiums will be higher when: n(strike price spot rate) is larger; nthe time to expiration date is longer; and nthe variability of the currency is greater. lCorporations with open foreign currency positions may use currency put options to cover their positions. nFor example, fi
31、rms may purchase put options to hedge future receivables. Currency Put Options Irwin/McGraw-Hill Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 9-41 Problem lIt is Nov. 21st, the spot rate is USD1.43/. A UK company has to make payment of USD4,500,000 in January. lDescribe and
32、 illustrate a hedging strategy using the Philadelphia currency option market ( use a strike price of USD1.44/ ). lWhat would be the sterling amount under the two scenarios of forex spot rate in January being lUSD1.35/ USD1.50/ Irwin/McGraw-Hill Copyright 2001 by The McGraw-Hill Companies, Inc. All r
33、ights reserved. 9-42 Currency put option Per unit Per contract Selling price $1.40 $43,750(1.40 x31,250) -purchase price -1.30 -40,625(1.30 x31,250) -premium -0.04 -1,250(0.04x31,250) =net profit $1,875 Irwin/McGraw-Hill Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 9-43 Eur
34、opean Currency Options lEuropean-style currency options are similar to American-style options except that they can only be exercised on the expiration date. lFor firms that purchase options to hedge future cash flows, this loss in terms of flexibility is probably not an issue. Hence, if their premiu
35、ms are lower, European-style currency options may be preferred. Irwin/McGraw-Hill Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 9-44 Efficiency of Currency Futures and Options lIf foreign exchange markets are efficient, speculation in the currency futures and options markets
36、 should not consistently generate abnormally large profits. lA speculative strategy requires the speculator to incur risk. On the other hand, corporations use the futures and options markets to reduce their exposure to fluctuating exchange rates. Irwin/McGraw-Hill Copyright 2001 by The McGraw-Hill C
37、ompanies, Inc. All rights reserved. 9-45 Mini Case A speculator is considering the purchase of five three month Japanese yen call option with a striking price of 96 cents per 100 yen. The premium is 1.35cents per 100 yen. The spot price is 95.28 cents per 100 yen and 90 day forward rate is 95.71 cen
38、ts. The speculator believes the yen will appreciate to $1.00 per 100 yen over the next three months. As the speculators assistant, you have been asked to prepare the following: 1.Graph the call option cash flow schedule. 2.Determine the peculators profit if the yen appreciates to $1.00/100yen. 3.Determine the speculators profit if the yen appreciates only to the forward rate. 4.Determine the future spot price which the speculator will only break even.
