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International Finance Essay

2820 words - 12 pages


Fifth Edition EUN / RESNICK


Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.

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.


Chapter Seven



Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.



Chapter Outline (Material to be Covered in Class)

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

All rights reserved.


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.
7-5 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.



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 

$1 ¥150

Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.

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.
7-7 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.



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).

7-8 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.

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
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.

Currency futures markets are dwarfed by OTC




The Chicago Mercantile Exchange

Expiry cycle:
March, June, September, December.

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

Last trading day
Two business days before the delivery day

CME hours
 

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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