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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Title: Hedging Foreign Exchange Exposure
Approximate Word Count: 3955
Approximate Pages: 16 (250 words per double-spaced page)

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