Currency Futures and Forwards. Outline Meaning of Futures Features of Futures Contracts Using...
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Transcript of Currency Futures and Forwards. Outline Meaning of Futures Features of Futures Contracts Using...
![Page 1: Currency Futures and Forwards. Outline Meaning of Futures Features of Futures Contracts Using Futures for Hedging and Speculation Meaning of Forwards.](https://reader036.fdocuments.us/reader036/viewer/2022082710/56649db15503460f94aa04c4/html5/thumbnails/1.jpg)
Currency Currency Futures and Futures and
ForwardsForwards
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OutlineOutline• Meaning of Futures• Features of Futures Contracts• Using Futures for Hedging and
Speculation• Meaning of Forwards• Features of Forward Contracts• Using Forwards for Hedging and
Speculation
![Page 3: Currency Futures and Forwards. Outline Meaning of Futures Features of Futures Contracts Using Futures for Hedging and Speculation Meaning of Forwards.](https://reader036.fdocuments.us/reader036/viewer/2022082710/56649db15503460f94aa04c4/html5/thumbnails/3.jpg)
Futures ContractsFutures Contracts• A futures contract is an agreement to buy
or sell a specified quantity of a specified asset at a certain point in the future at a price agreed upon today
• In the case of currencies, it is an agreement to buy/sell a specified quantity of a specific currency at a pre agreed upon exchange rate at a certain time in the future
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Currency FuturesCurrency Futures• Trade on an organized exchange• Futures contracts are standardized with
regard to the following– The asset on which you trade a futures
contract– The contract size– Delivery arrangements
• Daily price movement limits-limit up and limit down
• Position limits• Mark to Market on a daily basis
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Corporate Use of Currency Corporate Use of Currency FuturesFutures
• Hedge open positions in foreign currencies by buying/selling currency futures
• Foreign currency cash inflows– Risk: domestic currency may appreciate – Strategy: sell foreign currency in the futures
market at the futures exchange rate (Short)
• Foreign currency cash outflows– Risk: domestic currency may depreciate– Strategy: buy foreign currency in the futures
market at the futures exchange rate (Long)
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Forward ContractsForward Contracts• Agreement to buy or sell an asset at a
certain time in the future for a predetermined price
• Over-the-counter product that do not trade on any organized exchange
• Delivery date can be any date that is mutually convenient to both the parties to the contract
• Size can be customized • Not marked-to-market daily
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Hedging and Speculation Hedging and Speculation using Forwardsusing Forwards
• Expect a currency to appreciate– Buy that currency forward (Long Position)
• Expect a currency to depreciate– Sell that currency forward (Sell Position)
• Profit/Loss in a long position: ST – K• Profit/Loss in a short position: K – ST
Where ST is the spot exchange rate at maturity and K is the forward exchange rate at which you buy/sell a currency forward.