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# International Finance Essay

2820 words - 12 pages

9/25/2010

INTERNATIONAL FINANCIAL MANAGEMENT
Fifth Edition EUN / RESNICK

7-0

Futures and Options on Foreign Exchange
Chapter Objective:

This chapter discusses exchange-traded currency futures contracts, options contracts, and options on , p , p Fourth Edition currency futures.
EUN / RESNICK

INTERNATIONAL FINANCIAL MANAGEMENT

Chapter Seven

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Chapter Outline (Material to be Covered in Class)

Futures Contracts:
  ...view middle of the document...

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Daily Resettlement: An Example

Suppose you want to speculate on a rise in the \$/¥ exchange rate (specifically you think that the dollar will appreciate).
U.S. \$ equivalent Wed Tue 0.007142857 0.007194245 0.006993007 0.007042254 0.006666667 0.006711409 0.00625 0.006289308 Currency per U.S. \$ Wed Tue 140 139 143 142 150 149 160 159

Japan (yen) 1-month forward 3-months forward 6-months forward

Currently \$1 = ¥140. The 3-month forward price is \$1=¥150.

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Daily Resettlement: An Example

Currently \$1 = ¥140 and it appears that the dollar y pp is strengthening. If you short a ¥ futures (i.e., enter into a 3-month CME futures contract to sell ¥ at the rate of \$1 = ¥150), then you will make money if the ¥ depreciates (i.e, the \$ goes up). Th contract size is ¥12,500,000. ) The t t i i ¥12 500 000 Your initial margin is 4% of the contract value:
\$3,333.33  .04  ¥12,500,000 
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\$1 ¥150

Daily Resettlement: An Example
If tomorrow, the futures rate closes at \$1 = ¥149, then your position’s value drops. (why?) Your original agreement “was to sell ¥12,500,000 and receive \$83,333.33” (sort of…) But now ¥12,500,000 is worth \$83,892.62
\$83,892.62  ¥12,500,000  \$1 ¥149

You have lost \$559.28 overnight.

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Daily Resettlement: An Example

The \$559.28 comes out of your \$3,333.33 margin account, l i \$2,774.05 leaving \$2 4 0 This is short of the \$3,355.70 required for a new position.
\$3,355.70  .04  ¥12,500,000  \$1 ¥149

Your broker ill l t Y b k will let you slide until you run through lid til th h your maintenance margin. Then you must post additional funds (variation margin) or your position will be closed out (usually via reversing trade).

Currency Futures Markets

The IMM division of the Chicago Mercantile Exchange (CME) is by far the largest. Others major players:

London International Financial Futures Exchange
 EuroNext-LIFFE

 

Tokyo International Financial Futures Exchange (TIFFE) NYBOT (ref. for contracts on € – see FT quotes) Though the growth rate has accelerated

Currency futures markets are dwarfed by OTC

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The Chicago Mercantile Exchange

Expiry cycle:
March, June, September, December.

Delivery date:
3rd Wednesday of delivery month, CLS (since 03-06).

Two business days before the delivery day

CME hours
 
7-10

7:20 a.m. to 2:00 p.m. CST ( = Chicago time) Extended hours on Globex
Copyright © 2007 by The McGraw-Hill Companies, Inc....

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