International Finance Multiple choice questions, finish within 30 mins
Student Lee 
ch0811.ppt*
Multinational Financial Management
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CHAPTER 8
CURRENCY FUTURES AND OPTIONS MARKETS
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CHAPTER OVERVIEW
I. FUTURES CONTRACTS
II. CURRENCY OPTIONS
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PART I.
FUTURES CONTRACTS
I. CURRENCY FUTURES
A. Background
1. 1972: Chicago Mercantile
Exchange
opens International Monetary Market. (IMM)
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FUTURES CONTRACTS
2. IMM provides
a. an outlet for hedging currency risk with futures contracts.
b. Definition of futures contracts:
contracts written requiring
a standard quantity of an available currency
at a fixed exchange rate
at a set delivery date.
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FUTURES CONTRACTS
c. Available Futures Currencies:
1.) British pound 5.) Euro
2.) Canadian dollar 6.) Japanese yen
3.) Deutsche mark 7.) Australian dollar
4.) Swiss franc
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FUTURES CONTRACTS
d. Standard Contract Sizes:
contract sizes differ for each of
the 7 available currencies.
Examples:
Euro = 125,000
British Pound = 62,500
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FUTURES CONTRACTS
e. Transaction costs:
payment of commission to a trader
f. Leverage is high
1.) Initial margin required is
relatively low (e.g. less than .02% of sterling contract value).
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FUTURES CONTRACTS
g. Maximum price movements
1.) Contracts set to a daily price limit restricting maximum daily price movements.
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FUTURES CONTRACTS
2.) If limit is reached, a margin
call may be necessary to maintain a minimum margin.
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FUTURES CONTRACTS
h. Global futures exchanges that are competitors to the IMM:
1.) Deutsche Termin Bourse
2.) L.I.F.F.E.London International Financial Futures Exchange
3.) C.B.O.T. Chicago Board of Trade
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FUTURES CONTRACTS
4.) S.I.M.E.X.Singapore International
Monetary Exchange
5.) H.K.F.E. Hong Kong Futures Exchange
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FUTURES CONTRACTS
B. Forward vs. Futures Contracts
Basic differences:
1. Trading Locations 6. Settlement Date
2. Regulation 7. Quotes
3. Frequency of 8. Transaction
delivery costs
4. Size of contract 9. Margins
5. Delivery dates 10. Credit risk
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FUTURES CONTRACTS
Advantages of futures:
1.) Smaller
contract size
2.) Easy liquidation
3.) Well- organized
and stable market.
Disadvantages of futures:
1.) Limited to 7
currencies
2.) Limited dates
of delivery
3.) Rigid contract
sizes.
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PART II
CURRENCY OPTIONS
I. OPTIONS
A. Currency options
1. offer another method to hedge exchange rate risk.
2. first offered on Philadelphia
Exchange (PHLX).
3. fastest growing segment of
the hedge markets.
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CURRENCY OPTIONS
4. Definition:
a contract from a writer ( the seller) that gives the right not the obligation to the holder (the buyer) to buy or sell a standard amount of an available currency at a fixed exchange rate for a fixed time period.
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CURRENCY OPTIONS
5. Types of Currency Options:
a. American
exercise date may occur any
time up to the expiration date.
b. European
exercise date occurs only at the
expiration date.
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CURRENCY OPTIONS
7. Exercise Price
a. Sometimes known as the
strike price.
b. the exchange rate at which the option holder can buy or sell the contracted currency.
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CURRENCY OPTIONS
8. Status of an option
a. In-the-money
Call: Spot > strike
Put: Spot < strike
b. Out-of-the-money
Call: Spot < strike
Put: Spot > strike
c. At-the-money
Spot = the strike
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CURRENCY OPTIONS
9. The premium: the price of an
option that the writer charges the buyer.
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CURRENCY OPTIONS
B. When to Use Currency Options
1. For the firm hedging foreign
exchange risk
a. With sizable unrealized gains.
b. With foreign currency flows forthcoming.
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CURRENCY OPTIONS
2. For speculators
- profit from favorable exchange rate changes.
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CURRENCY OPTIONS
C. Option Pricing and Valuation
1. Value of an option equals
a. Intrinsic value
b. Time value
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CURRENCY OPTIONS
2. Intrinsic Value
the amount in-the-money
3. Time Value
the amount the option is in
excess of its intrinsic value.
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CURRENCY OPTIONS
4. Other factors affecting the
value of an option
a. value rises with longer
time to expiration.
b. value rises when greater volatility in the exchange rate.
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CURRENCY OPTIONS
5. Value is complicated by both
the home and foreign interest
rates.
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CURRENCY OPTIONS
D. Using Forward or Futures Contracts:
Forward and futures contracts are more suitable for hedging a known amount of foreign currency flow.
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CURRENCY OPTIONS
E. Market Structure
1. Location
a. Organized Exchanges
b. Over-the-counter
1.) Two levels
retail and wholesale
