FOREIGN CURRENCY FUTURES
First, we review some aspects of the
currencies cash markets with
emphasis on the:
Interest Rates Parity.
We then review the currency futures
markets with quasi-arbitrage and
hedging examples.
1
FOREIGN CURRENCY: THE CASH MARKET
EXCHANGE RATES:
THE VALUE (PRICE) OF ONE CURRENCY IN
TERMS OF ANOTHER CURRENCY IS THE
EXCHANGE RATE BETWEEN THE TWO
CURRENCIES.
THERE ARE TWO QUOTE FORMATS FOR
QUOTATIONS:
1. S($/FC)
THE NUMBER OF U.S. DOLLARS IN ONE
UNIT OF THE FOREIGN CURRENCY.
2. S(FC/$)
THE NUMBER OF THE FOREIGN CURRENCY
UNITS IN ONE U.S. DOLLAR.
2
NOT TAKING INTO ACCOUNT BID-ASK SPREAD:
1
S($/FC) =
S(FC/$)
1
1
S($/BP) = 1.6821 =
=
.5945 S(BP/$)
S(BP/$)  .5945
WHEN WE HAVE BID AND ASK QUOTES :
S($/FC)
S($/FC)

ASK
BID
S($/DM)
S(DM/$)
S($/DM)
S(DM/$)

ASK
ASK
BID
BID
1
S(FC/$)
1
S(FC/$)
BID
ASK
 $.500DM, buy DM1 pay 50 cents.
 DM2.083/$ , buy $1 pay DM2.08 3.
 $.480/DM, sell DM1 get 48 cents.
 DM2.000/$ , sell $1 get DM2.
3
CURRENCY CROSS RATES
LET FC1, FC2 AND FC3 DENOTE 3 DIFFERENT
CURRENCIES. THEN IN THE ABSENCE OF ARBITRAGE
OPPORTUNITIES, THE FOLLOWING EQUALITY MUST
HOLD:
S(FC1/FC3) S(FC3/FC2)
S(FC1/FC2) =
=
S(FC2/FC3) S(FC3/FC1)
DOLLAR ECU
POUND
SFRAC
CANADA
1.5462
1.8046
2.5672
1.1138
FRANCE
5.6499
6.5942
9.3805
4.0699
GERMANY
1.6848
1.9662
2.7969
1.2135
ITALY
1667
1945.6
2767.7
1200.8
JAPAN
121.8
142.16
202.22
MEXICO
10.03
11.706
NEDERLAND
1.8999
SWITZERLAND
U.K.
ECU
0.8568
US
GUILDER
PESO
YEN
LIRA
DMARK
0.15416
0.01269
0.00093
0.91784
2.9738
0.5633
0.04639
0.00339
3.3539
0.88668
0.16796
0.01383
0.00101
877.41
166.2
13.686
87.74
64.109
12.144
16.653
7.2252
5.2792
2.2174
3.1544
1.3686
1.3882
1.6202
2.3048
0.6023
0.70297
1.1671
0.81383
0.18942
FFRANC
CDNDLR
0.27367
3.6541
0.29876
1.0895
989.55
295.05
1078.1
0.07307
72.302
21.558
78.774
0.08235
0.00602
5.9539
1.7753
6.4869
0.0156
0.00114
1.1278
0.33627
1.2288
0.73067
0.1384
0.0114
0.00083
0.82405
0.2457
0.89781
0.43387
0.31702
0.06005
0.00494
0.00036
0.35753
0.1066
0.38954
1.4225
0.6172
0.45097
0.08542
0.00703
0.00051
0.50861
0.15165
0.55413
1.6603
0.72036
0.52634
0.0997
0.00821
0.0006
0.59361
0.17699
KEY CURRENCY CROSS RATE
NOV 12,1998
4
CURRENCY CROSS RATES
EXAMPLE
Let FC1  $; FC2  Peso; FC3  BP.
S(FC3/FC2) S(FC1/FC3)
S(FC1/FC2) =
=
.
S(FC3/FC1) S(FC2/FC3)
S($/Peso)  .0997;
S($/BP)  1.6603
S(Peso/BP)  16.653.
S(BP/Peso) .06005

 .0997.
S(BP/$)
.6023
S($/BP)
1.6603

 .0997.
S(Peso/BP) 16.653
5
AN EXAMPLE OF CROSS SPOT RATES
ARBITRAGE
DOLLAR
POUND
CHF
SWITZERLAND 1.7920
2.8200
1.0000
U.K.
0.6394
1.0000
0.3546
U.S.
1.0000
1.5640
0.5580
THE CROSS RATE EQUALITIES DO NOT HOLD:
S(BP/$)
THEORY :
= S(CHF/$)
S(BP/CHF)
BUT : .6394 = 1.8031  1.7920
.3546
S($/BP)
SIMILARLY :
= S(CHF/BP)
S($/CHF)
BUT :
1.5640
= 2.8029 < 2.8200
.5580
6
THE CASH ARBITRAGE ACTIVITIES:
$1,000,000
$1,006,134.26
.6394
.5580
BP639,400
2.8200
CHF1,803,108
7
DETERMINANTS OF FOREIGN
EXCHANGE RATES
Most foreign currencies today, are
determined in free exchange
markets, I.e., by supply and demand
without any Government
intervention. In other words, the
exchange rates of most countries are
floating rates.
Exchange rates are quoted for cash
transactions as well as for forward
transactions.
8
Freely floating exchange rates.
No central bank intervention
Managed floating exchange rate.
The central bank takes part in
the market to influence the
exchange rate value.
Pegged exchange rate systems.
The value of one currency is fixed
in terms of another currency, that
itself floats.
Again, the central bank must
operate in the market to ensure
the pegged rate.
9
WSJ
10
THE INTEREST RATES PARITY
Wherever financial flows are
unrestricted, goods’ prices, the
forward prices of these goods and
the interest rates in any two
countries must maintain a
NO- ARBITRAGE relationship.
This relationship is called the
Interest Rates Parity.
F($/FC) = S($/FC)e
(R DOM - R FOR )(T - t)
.
Next, we derive the parity, using the
cash-and-carry and the
11
reverse cash-and-carry strategies.
NO ARBITRAGE: CASH-AND-CARRY
TIME
CASH
FUTURES
t
(1) BORROW $A. rDOM
(4) SHORT FOREIGN
(2) BUY FOREIGN CURRENCY
CURRENCY FORWARD Ft,T($/FC)
A/S($/FC) [=AS(FC/$)]
(3) INVEST IN BONDS
DENOMINATED IN THE
AMOUNT:
AS(FC/$)e rFOR (T-t)
FOREIGN CURRENCY rFOR
T
(3) REDEEM THE BONDS
EARN
AS(FC/$)e rFOR (T-t)
(1) PAY BACK THE LOAN
Ae rDOM (T -t)
(4) DELIVER THE CURRENCY TO
CLOSE THE SHORT POSITION
RECEIVE:
F($/FC)AS( FC/$)e rFOR (T-t)
IN THE ABSENCE OF ARBITRAGE:
Ae rD (T t)  F($/FC)AS(FC/$)e rFOR (T-t)
F($/FC)  S($/FC)e (rDOM - rFOR )(T-t)
12
NO ARBITRAGE:
REVERSE CASH – AND - CARRY
TIME
CASH
FUTURES
t
(1) BORROW FC A. rFOR
(4) LONG FOREIGN
(2) BUY DOLLARS
CURRENCY FORWARD Ft,T($/FC)
AS($/FC)
AMOUNT IN DOLLARS:
AS($/FC)e R DOM (T-t)
(3) INVEST IN T-BILLS
FOR RDOM
T
REDEEM THE T-BILLS
EARN
TAKE DELIVERY TO CLOSE
AS($/FC)e rDOM (T-t)
PAY BACK THE LOAN
Ae
rFOR (T - t)
THE LONG POSITION
RECEIVE
AS($/FC)e rDOM ( T-t)
F($/FC)
IN THE ABSENCE OF ARBITRAGE:
Ae rFOR (T-t)
AS($/FC)e rDOM ( T-t)

F($/FC)
F($/FC)  S($/FC)e
(rDOM  rFOR )( T-t)
13
FROM THE CASH-AND-CARRY STRATEGY:
F($/FC)  S($/FC)e (rDOM - rFOR )(T-t)
FROM THE REVERSE CASH-AND-CARRY
STRATEGY:
F($/FC)  S($/FC)e (rDOM - rFOR )(T-t)
THE ONLY WAY THE TWO INEQUALITIES
HOLD SIMULTANEOUSLY IS BY BEING AN
EQUALITY:
F($ / FC) = S($ / FC)e (RDOM - RFOR )(T - t)
14
ON MAY 25 AN ARBITRAGER OBSERVES THE FOLLOWING MARKET PRICES:
S($/BP) = 1.5640 <=> S(BP/$) = .6393
F($/BP) = 1.5328 <=> F(BP/$) = .6524
RUS = 7.85% ; RGB = 12%
FTheoretical = 1.5640e
(.0785 - .12)
209
365
= 1.5273
THE THEORETICAL FORWARD PRICE IS LESS THAN THE MARKET PRICE
CASH AND CARRY
TIME
CASH
MAY 25
FUTURES
(1) BORROW $100M AT 7. 85%
FOR 209 DAYS
SHORT BP 68,477,215 FORWARD
FOR DEC. 20, FOR $1.5328/BP
(2) BUY BP63,930,000
(3) INVEST THE BP63,930,000
IN BRITISH BONDS
DEC 20
RECEIVE BP68,477,215
63,930,000e
.12
209
365
DELIVER BP68,477,215
FOR $104,961,875.2
= 68,477,215
REPAY YOUR LOAN:
100Me
.0785
209
365
= $104,597,484.3
ARBITRAGE PROFIT: 104,961,875.2 - 104,597,484.3 = $364,390.90
NOTICE THAT:
104,597,484/68,477,215 = 1,5275,
BUT THIS EXCHANGE RATE CANNOT BE GUARANTEED ON MAY 25.
15
THE INTEREST RATES PARITY
So far, we derived the interest rates
parity in a theoretical market. In the
real markets, buyers pay the ask
price while sellers receive the bid
price. Moreover, borrowers pay the
ask interest rate while lenders only
receive the bid interest rate.
Therefore, in the real markets, it is
possible for the forward exchange
rate to fluctuate within a band of
rates without presenting arbitrage
opportunities.Only when the market
forward exchange rate diverges from
this band of rates arbitrage exists.
16
NO ARBITRAGE: CASH - AND - CARRY
TIME
CASH
FUTURES
t
(1) BORROW $A. rD,ASK
(4) SHORT FOREIGN
(2) BUY FOREIGN CURRENCY
CURRENCY FORWARD
A/SASK($/FC)
FBID ($/FC)
(3) INVEST IN BONDS
r
A/S ASK ($/FC)e F,BID
DENOMINATED IN THE
(T-t)
FOREIGN CURRENCY rF,BID
T
REDEEM THE BONDS
EARN
DELIVER THE CURRENCY TO
r
A/S ASK ($/FC)e F,BID
PAY BACK THE LOAN
Ae
rD,ASK (T-t)
(T-t)
CLOSE THE SHORT POSITION
RECEIVE
FBID ($/FC)A/S( $/FC)e rFOR (T-t)
IN THE ABSENCE OF ARBITRAGE:
r
Ae D,ASK
(T t)
 FBID ($/FC)A/S ASK ($/FC)e F,BID
FBID ($/FC)  SASK ($/FC)e
r
(T-t)
(rD,ASK - rF,BID )(T -t)
17
NO ARBITRAGE:
REVERSE CASH - AND - CARRY
TIME
CASH
FUTURES
t
(1) BORROW FCA . rF,ASK
(4) LONG FOREIGN
(2) EXCHANGE FOR
CURRENCY FORWARD
r
AS BID ($/FC)e D,BID
ASBID ($/FC)
(T - t)
(3) INVEST IN T-BILLS
FOR FASK($/FC)
FOR rD,BID
T
REDEEM THE T-BILLS
EARN
TAKE DELIVERY TO CLOSE
r
AS BID ($/FC)e D,BID
PAY BACK THE LOAN
(T - t) THE LONG POSITION
RECEIVE
r
Ae
rF,ASK (T-t)
AS BID ($/FC)e D,BID
FASK ($/FC)
( T - t)
in foreign currency.
IN THE ABSENCE OF ARBITRAGE:
Ae
rF,ASK (T-t)
r
AS BID ($/FC)e D,BID

FASK ($/FC)
FASK ($/FC)  SBID ($/FC)e
( T - t)
(rD,BID rF,ASK )( T-t)
18
IN SUMMARY:
INEQUALITY 1:
FBID ($/FC)  SASK ($/FC)e
(rD,ASK - rF,BID )(T-t)
INEQUALITY 2:
FASK ($/FC)  SBID ($/FC)e
NOTICE THAT:
(rD,BID rF,ASK )( T-t)
RHS(1) > RHS(2)
FASK($/FC) > FBID($/FC).
FBID
.
.
RHS(2)
RHS(1)
FASK
CONCLUSION: ARBITRAGE EXISTS ONLY
WHEN BOTH FUTURES PRICES ARE ABOVE
RHS(1) OR BOTH ARE BELOW RHS(2)
19
EXAMPLE:
The following are market prices
on a given day:
S($/NZ) F($/NZ)
ASK $0.4438 $0.4480
BID $0.4428 $0.4450
R(NZ)
R(US)
6.000% 10.8125%
5.875% 10.6875%
Clearly, F(ask) > F(bid).
What remains to be checked is
whether the inequalities are
satisfied or not.
20
EXAMPLE: INEQUALITY 1:
FBID ($/FC)  SASK ($/FC)e
(rD,ASK - rF,BID )(T-t)
.4450 < (.4438)e(.108125 - .05875)/12 = .4456
INEQUALITY 2:
FASK ($/FC)  SBID ($/FC)e
(rD,BID rF,ASK )( T-t)
.4480 > (.4428)e(.106875 - .06000)/12 = .4445
FBID = .4450
.
RHS(2)=.4445
FASK=.4480
..
.
RHS(1)=.4456
 NO ARBITRAGE OPPORTUNITY EXISTS.
21
EXAMPLE:
The following are market prices
on a given day:
S($/NZ) F($/NZ)
ASK $0.4431 $0.4480
BID $0.4428 $0.4450
R(NZ)
R(US)
6.000% 10.7025%
5.888% 10.6875%
Clearly, F(ask) > F(bid).
What remains to be checked is
whether the inequalities are
satisfied or not.
22
EXAMPLE: INEQUALITY 1:
FBID ($/FC)  SASK ($/FC)e
(rD,ASK - rF,BID )(T-t)
.4450 < (.4431)e(.107025 - .05888)/12 = .4449
INEQUALITY 2:
FASK ($/FC)  SBID ($/FC)e
(rD,BID rF,ASK )( T-t)
.4480 > (.4428)e(.106875 - .06000)/12 = .4445
FBID = .4450
.
RHS(2)=.4445
FASK=.4480
.
.
RHS(1)=.4449
 ARBITRAGE OPPORTUNITY EXISTS.
23
FOREIGN CURRENCY CONTRACT
SPECIFICATIONS
CURRENCY
SIZE
MIN.
MIN.F.
CHANGE
CHANGE
JAPAN YEN
12.5M
.000001
$12.50
CAN. DOLLAR
100,000
.0001
$10.00
62,500
.0002
$12.50
SWISS FRANC
125,000
.0001
$12.50
AUSTRALIAN DOLLAR
100,000
.0001
$10.00
MEXIAN PESO
500,000
.000025
$12.50
BRAZILIAN REAL
100,000
.0001
$10.00
EURO FX
125,000
.0001
$12.50
BRITISH POUND
* THERE ARE NO DAILY PRICE LIMITS
* CONTRACT MONTHS FOR ALL CURRENCIES:
MARCH, JUNE, SEPTEMBER, DECEMBER
LAST TRADING DAY: FUTURES TRADING TERMINATES AT
9:16 AM ON THE SECOND BUSINESS DAY IMMEDIATELY
PRECEEDING THE THIRD WEDNESDAY OF THE CONTRACT
MONTH.
DELIVERY BY WIRED TRASFER. 3RD WEDNESDAY OF
CONTRACT MONTH
24
SPECULATION: TAKE RISK FOR EXPECTED
PROFIT
AN OUTRIGHT NAKED POSITION
k - MARCH 1.
S($/CD) = .6345 <=> S(CD/$) = 1.5760
t- SEPTEMBER
F($/CD) = .6270 <=> F(CD/$) = 1.5949
SPECULATOR:
“THE CD WILL NOT DEPRECIATE TO THE
EXTENT IMPLIED BY THE SEP. FUTURES.
INSTEAD, IT WILL DEPRECIATE TO A PRICE
HIGHER THAN $.6270/CD.”
TIME
CASH
MAR 1
DO NOTHING
FUTURES
LONG N, CD FUTURES
AT $.6270/CD
AUG 20
DO NOTHING
SHORT N, CD FUTURES
AT $.6300/CD
PROFIT = ($.6300/CD - $.6270/CD)(CD100,000)(N) = $300(N).
25
INTERCURRENCY FUTURES SPREAD
A FUTURES CROSS-CURRENCY SPREAD IS THE PURCHASE OF
ONE CURRENCY FUTURES AND THE SIMULTANEOUS SALE OF
ANOTHER CURRENCY FUTURES; BOTH FUTURES ARE FOR THE
SAME DELIVERY MONTH.
A POSITION TRADER OBSERVES THE FOLLOWING RATES:
CROSS RATES
MARCH 1:
$1.7225/BP
$.6369/CHF  BP.3698/CHF
JUNE Fs
$1.7076/BP
$.6448/CHF  BP.3776/CHF
(Currently: 1BP = 2.7042CHF. JUN Fs: 1BP = 2.6483CHF)
SPECULATOR:
“THE BRITISH POUND WILL DEPRECIATE
RELATIVE TO THE SWISS FRANK BY LESS
THAN WHAT IS EXPECTED ACCORDING TO THE
JUNE FUTURES CROSS RATE. IN FACT, I
BELIEVE THAT THE BRITISH POUND WILL
APPRECIATE AGAINST THE SWISS FRANC
BETWEEN NOW AND THE END OF MAY TO
AROUND BP.3600/CHF OR, BP2,7778/CHF.”
IN OTHER WORDS, THE SPREAD $1.7076/BP - $.6448/CHF = $1.0628
WILL INCREASE!!!!
BUY THIS SPREAD!
LONG THE BP JUNE FUTURES AND SIMULTANEOUSLY,
SHORT THE SF JUNE FUTURES
26
TIME
CASH
MAR 1
DO NOTHING
SF Fs = 125,000CHF
BP Fs = 62,5000BP
FUTURES
SHORT 1 JUNE CHF
FUTURES FOR $.6448/CHF
LONG 2 JUNE BP
FUTURES FOR $1.7076/BP
SPREAD COST = $1.7076 - $.6448 = $1.0628
MAY 20
DO NOTHING
CLOSE YOUR SPREAD:
LONG 1 JUNE CHF
FUTURES FOR $.630/CHF
SHORT 2 JUNE BP
FUTURES FOR $1.730/BP
SPREAD REVENUE = $1.730 - $.6300 = $1.1000
PROFIT = ($1.1000 - $1.0628)(125,000) = $4,650/CONTRACT
NOTICE THAT THE BP HAS APPRECIATED
FROM BP.3698/CHF ( 1BP = 2.7042CHF) IN MARCH TO
$.6300/CHF/$1.730/BP = BP.3642/CHF (1BP = 2.7457CHF) IN
JUNE
27
BORROWING U.S. DOLLARS
SYNTHETICALLY ABROAD
OR
HOW TO BEAT THE DOMESTIC BORROWING
RATE – A CASE OF QUASI-ARBITRAGE
A FIRM NEEDS TO BORROW $200M FROM MAY 25,2001 TO
DECEMBER 20, 2001, FACES THE FOLLOWING DATA:
SPOT:
DEC. FUTURES
BID
$.4960/NZ
NZ2.0125/$
ASK
$.4968/NZ
NZ2.0161/$
BID
$.5024/NZ
NZ1.9889/$
ASK
$.5028/NZ
NZ1.9904/$
INTERST RATE
BID
ASK
r(NZ)
6.75%
6.8634% (365-DAY YEAR)
r(USA)
8.50%
9.90%
(360-DAY YEAR)
28
IN THE SPIRIT OF
REVERSE CASH-AND-CARRY
TIME
MAY 25
CASH
FUTURES
(1) BORROW NZ403,220,000
AT AN ANNUAL RATE OF
LONG 3,355 DEC. NZ
FUTURES FOR F = .5028
6.8634% FOR 209 DAYS
419,382,000
N
= 3,355
125,000
(2) EXCHANGE THE
NZ403,220,000 INTO
403,220,000
= $200M
2.061
LOAN VALUE ON DEC. 20
403,220,000e
(.068634)209/365
= NZ419,382,000
DEC 20
TAKE DELIVERY OF
NZ419,382,000 BY PAYING
REPAY THE LOAN 
$200,000,000e
209
(.099)
360
 $211,831,758
$419,382,000(.5028)
= $210,865,000 compared
with:
THE IMPLIED REVERSE REPO RATE
FOR 209 DAYS =
365 210,865,000
ln[
] = .0924
209 200,000,000
or 9.24%.
29
EXAMPLES OF FOREIGN CURRENCY
LONG HEDGES
EXAMPLE 1.
ON JULY 1, AN AMERICAN AUTOMOBIL DEALER ENTERS INTO A
CONTRACT TO IMPORT 100 BRITISH SPORT CARS FOR BP28,000
EACH. PAYMENT AND DELIVERY WILL BE MADE IN BRITISH
POUNDS ON NOVEMBER 1.
RISK EXPOSURE: IF THE BP APPRECIATES RELATIVE TO THE $
THE IMPORTER’S COST WILL RISE.
TIME
JUL. 1
CASH
S($/BP) = 1.3060
CURRENT COST = $3,656,800
DO NOTHING
NOV. 1
FUTURES
BUY 46 DEC BP FUTURES
FOR F = $1.2780/BP
N =
3,656,800
= 46
62,500(1.2780)
S($/BP) = 1.4420
SELL 46 DEC BP FUTURES
COST = 28,000(1.4420)
FOR F = $1.4375/BP
= $40,376/CAR, OR
PROFIT
$4,037,600 FOR THE
(1.4375 - 1.2780)62,500(46)
100 CARS
= $458,562.50
ACTUAL COST = $3,579,037.50
30
A LONG HEDGE
EXAMPLE 2.
ON MARCH 1, AN AMERICAN WATCH RETAILER AGREES TO
PURCHASE 10,000 SWISS WATCHES FOR CHF375 EACH. THE
SHIPMENT AND THE PURCHASE WILL TAKE PLACE ON
AUGUST 26.
TIME
MAR. 1
CASH
FUTURES
S($/CHF) = .6369
LONG 30 SEP CHF FUTURES
CURRENT COST 10,000 (375)(.6369) F(SEP) = $.6514/CHF
= $2,388,375
CONTRACT = (.6514)125,000
DO NOTHING
= $81,425.
2,388,375
N =
= 30
81,425
AUG. 25 S=$.6600/CHF
SHORT 30 SEP CHF FUTURES
WATCHES FOR
F(SEP) = $.6750/CHF
BUY 10,000 WATCHES
PROFIT:
AT 375(.6600) = $247.50/WATCH (.6750 - .6514)125,000(30)
TOTAL $2,475,000.
= $88,500.
ACTUAL COST $2,386,500
31
LONG HEDGE: PROTECT AGAINST
DEPRECIATING DOLLAR
EXAMPLE 3.
AN AMERICAN FIRM AGREES TO BUY 100,000
MOTORCYCLES FROM A JAPANESE FIRM FOR ¥202,350 .
CURRENT PRICE DATA:
SPOT:
S(ask) = $.007020/ ¥
¥ 142.30/$
S(bid) = $.007027/ ¥
¥ 142.45/$
DEC FUTURES: F(ask) = $.007190/ ¥
¥ 139.08/$
F(bid) = $.007185/ ¥
¥ 139.19/$
ON DECEMBER 20 THE FIRM NEEDS ¥ 20,235,000,000
THIS SUM IS 20,235,000,000(.007027) =
= $142,191,345 IF PURCHESED TODAY.
N = $142,191,345/(¥ 12,500,000)($.007190/JY) = 1,582.
32
TIME
CASH
MAY 23 DO NOTHING
FUTURES
LONG 1,582 JY
FUTURES FOR
CURRENT VALUE = $142,191,345
F(ask) = $.007190/ ¥
CASE I:
DEC 20 S = $.0080/ ¥
SHORT 1,582JY Fs.
BUY MOTORCYCLES
FOR $.0080/ ¥
FOR $161,880,000
PROFIT:(.0080-.00719)12,500,000(1,582)
= $16,017,750
NET COST: $161,880,000 - $16,017,750 = $145,862,250.
CASE II:
DEC 20 S = $.0065/ ¥
SHORT 1,582 JY Fs.
PURFHASE PRICE
FOR $.0065/ ¥
$131,527,500
LOSS: (.00719-.0065)12,500,000(1,582)
= $13,644,750
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NET COST: $145,172,250.
A SHORT HEDGE
A U.S. BASED MULTINATIONAL COMPANY’S MEXICAN SUBSIDIARY
WILL GENERATE EARNINGS OF MP100M AT THE END OF THE
QUARTER - MARCH 31. THE MONEY WILL BE DEPOSITED IN THE
NEW YORK BANK ACCOUNT OF THE FIRM IN U.S. DOLLARS.
RISK EXPOSURE: IF THE DOLLAR APRECIATES RELATIVE TO THE
MEXICAN PESO THERE WILL BE LESS DOLLARS TO DEPOSIT.
TIME
CASH
FEB. 21 S($/MP) = .I000
CURRENT SPOT VALUE
FUTURES
F(JUN) = $.1250/DM
F = 500,000($.1250MP) =
$62,500
= $10M.
DO NOTHING
N=
10,000,000
= 160
62,500
SHORT 160 JUN MP FUTURES
MAR 31 S($/MP) = .0925
LONG 160 JUN MP FUTURES
DEPOSIT
F(JUN) = $.1165/DM
100,000,000(.0925)
PROFIT:
= $9,250,000
(.1250 - .1165)500,000(160)
= $680,000
TOTAL AMOUNT TO DEPOSIT $9,930,000
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