Chapter 7 Currency Futures, Options and Swaps

1、Chapter 7 Currency futures, options, and swaps 7.1 IntroductionDerivative instruments are financial claims with value based on that of the underlying securities. Derivatives are originated and traded both on organized exchanges and over-the-counter. Market structureA basic function of exchange-trade

2、d derivatives markets is to provide liquidity through large volume, standardized contracts, price transparency, and the interposition of the clearing house as a central counterparty. Over-the-counter markets provide users with contracts that can be tailored to individual requirements. 7.2 Currency f

3、uturesFutures markets-role of the exchange:Futures contracts provide important services to those who make use of the exchange market. The CME makes use of the following to assure a high level of customer protection.1. Margin requirementsThese requirements minimize potential injury to customers in th

4、e event of any member firms financial reversal or insolvency. 2. Protection against insolvency This law requires that member firms of futures exchanges maintain capital at prescribed levels, and that customers funds be segregated from a member firms funds. 3. Protection against default The CME Clear

5、ing House deals directly with its own member firms and not individual market participants. 4. Clearing systemThe clearing house functions as guarantor of performance for each futures and options contract. Contract speculations Standardized futures contracts contain numerous features that are defined

6、 by the exchange. The standardized features of foreign currency futures cover 1) trading unit or size of contract, 2) method of price quotation, 3) minimum price change, 4) price limits, 5) maturities, 6) specified final trading date, 7) settlement date, and, 8) collateral or margin requirements. Bu

7、ying, selling, and closing out a futures positionA purchase gives the buyer a long position in the foreign currency, A sale of a foreign currency future gives the seller a short position in the currency. 7.3 Currency optionsCurrency options give the holder the right to exercise the option until its

8、expiration. American style options can be exercised at any time until expiration of the option. European style options can be exercised only at the maturity date.There are two parties to an option contract: the option seller or writer and the option buyer who can be a hedger or speculator. Option ma

9、rket quotationsThree elements are important in the purchase of an option of an option contract, namely, the strike price, maturity date of the option contract, and premium paid for the option. Factors controlling option premiumsThe value of an option consists of two components: intrinsic value and t

10、ime value. The following steps are involved in this calculation:1. calculate the intrinsic value (spot price minus strike price);2. take the difference between intrinsic value and total value; 3. the remainder in step 2 constitutes time value.Comparison of options and futures contractsA company inte

11、rested in hedging or speculating on an increase in the value of the pound sterling can purchase a pound sterling currency future, or purchase a pound sterling call option. Finally, we can obtain an overview of the position of a buyer or writer of call and put options. Options on futuresA currency fu

12、tures contract has a relative modest transaction cost in the form of brokerage commissions paid to specialist firms that operate on the futures exchange. In addition there are initial margin and maintenance margin costs. If an offsetting transaction is not made prior to expiration of the futures con

13、tract, the contract holder will have to make settlement. 7.4 Currency and interest swapsCurrency swaps involve the exchange of interest and foreign currency cash flows or a combination of both. Currency swapsA currency swap is a transaction in which two counterparties exchange specific amounts of tw

14、o different currencies at the outset and repay over time in accordance with a predetermined rule that reflects both interest payments and the amortization of the principal. Normally, fixed interest rates are used for each currency. In some cases, there is no exchange of principal amounts initially a

15、nd at maturity.Interest rate swapsThe basic kind of interest rate swap, called a fixed-for-floating swap, involves the exchange of a notional principal valued at fixed and floating (variable) interest rates denominated in the same currency. Figure 7.1 Fixed-for-floating interest rate swapCross-currency interest rate swapsA cross-currency interest rate swap involves the exchange of paymen