Chapter 5 Foreign Currency Derivatives
Use of Derivatives
- Speculation: To make money
- Hedging: To reduce the risk of future cash flows
Questions: 9, 10
Problems: 2, 5, 9
Futures Contract
Def: Is similar to a Forward contract in the sense that it is an agreement between two parties about a future delivery of an amount of foreign exchange at a fixed price, time, and place. The main difference is that futures are a standardized contract traded on an exchange while forwards are negotiated.
Short Position: Want to sell. (eg. p96) You are expecting the currency to fall in value. Therefore you chose to sell the currency in the future to make a speculative profit.
Short Position (value at maturity) = - contract amount x (spot rate at maturity futures rate/settle price)
Long Position: Want to buy (eg p 96). You are expecting the currency to gain in value. Therefore you chose to buy the currency in the future to make a speculative profit.
Long Position......
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