FNC 470 – Moore
Chapter 8 Notes
Spring 2006
Currency Futures and Options Markets
PART I.FUTURES CONTRACTS
I.
CURRENCY FUTURES
A.
Background
1.
Long history
2.
Extremely volatile due to information driven nature
3.
Price Discovery Role
1972: Chicago Mercantile Exchange opens
Monetary Market (IMM).
the International
2.
IMM provides
a.
an outlet for hedging currency risk with futures
contracts.
Definition:
contracts written requiring a standard quantity of an available
currency at a fixed exchange rate at a set delivery date.
b.
Available Futures Currencies/Contract Size:
1.) British pound / 62,500
2.) Canadian dollar /100,000
3.) Euro / 125,000
4.) Swiss franc / 125,000
5.) Japanese yen / 12.5 million
6.) Mexican peso / 500,000
7.) Australian dollar / 100,000
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FNC 470 – Moore
Chapter 8 Notes
Spring 2006
c.
Transaction costs: commission payment to a floor trader
d.
Leverage is high
1.) Initial margin required is relatively low (less than 2%
contract value).
of
FUTURES CONTRACTS: SAFEGUARDS
e.
Maximum price movements
1.) Contracts set to a daily price limit restricting maximum daily
price movements.
2.) If limit is reached, a margin call may be necessary to
maintain a minimum margin.
f.
Global futures exchanges:
1.) I.M.M. International Monetary Market
2.) L.I.F.F.E. London International
Financial Futures
Exchange
3.) C.B.O.T. Chicago Board of Trade
4.) S.I.M.E.X.Singapore International Monetary Exchange
5.) D.T.B. Deutsche Termin Bourse
6.) H.K.F.E. Hong Kong Futures Exchange
B.
Forward vs. Futures Contracts
Basic differences:
1. Trading Locations
2. Quotes
3. Regulation
4. Margins
5. Frequency of delivery
6. Credit risk
7. Size of contract
8. Transaction Costs
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FNC 470 – Moore
Chapter 8 Notes
Advantages of futures:
1.) Easy liquidation
2.) Well- organized and stable market.
Disadvantages of futures:
1.) Limited to 7 currencies (WRONG)
2.) Limited dates of delivery
3.) Rigid contract sizes.
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Spring 2006
FNC 470 – Moore
Chapter 8 Notes
Spring 2006
Real Future’s Contract Specifications and quotes
Source:
http://www.cme.com/clearing/clr/spec/contract_specifications.html?type=cur
CME Australian Dollar Futures
Trade Unit 100,000 Australian dollars
Settle
Method
Physically Delivered
Point
1 point = $.0001 per Australian dollar = $10.00 per contract
Descriptions
Contract
Listing
Six months in the March Quarterly Cycle. Mar, Jun, Sep, Dec.
Strike Price
N/A
Interval
Product
Code
Clearing=AD
Ticker=AD
GLOBEX=6A
AON=LA
(50 Threshold)&
Trading Venue: Floor
Minimum
Regular
Fluctuation
Calendar Spread
All or None
Trading Venue: CME® Globex®
Mon/Thur 5:00 p.m.-4:00 Margin
Hours p.m. Sun & Hol 5:00
p.m.-4:00 p.m.
0.0001=$10.00
0.00005=$5.00
0.00005=$5.00
Initial
$1,283
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Maintenance
$950
FNC 470 – Moore
Chapter 8 Notes
-5-
Spring 2006
FNC 470 – Moore
Chapter 8 Notes
Spring 2006
Mechanics of a Future’s Contract
Australian Dollar Futures Contract Information and Quotes from CME
CME® Globex® FUTURES
CME Australian Dollar Futures
CME Globex quotes as of 07/20/06 06:00 am (cst)
MTH/
STRIKE
SEP06
DEC06
MAR07
JUN07
SEP07
DEC07
TOTAL
TOTAL
--- SESSION --OPEN
HIGH
.7503
.7475
-------------
.7509
.7496B
-------------
LOW
.7483
.7475
-------------
PT
EST
VOL
LAST
SETT
CHGE
.7499A
.7489A
-------------
-------------------
+9 2898
+10
3
UNCH
UNCH
UNCH
UNCH
EST. VOL
---- PRIOR
SETT
DAY ---
VOL
INT
.7490 30991
54135
.7479
68
584
.7466
9
.7452
4
.7438
2
.7424
VOL
OPEN INT.
31,059
54,734
Question 1.
Suppose you want to long 1 September 2006 futures contract. How much initial margin must you deposit into your account?
Question 2.
Suppose you bought the September futures contract at .7499 and at the end of the day it settled at .7418. How much would be added
or subtracted from your account?
Question 3.
At what price on the long June 2006 contract would you get your first margin call?
Question 4.
If you received a margin call, to what amount (account level) must you bring your balance to?
Question 5.
What is the notational value of Australian Dollars at risk for the September 2006 Contract (one-side)?
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FNC 470 – Moore
Chapter 8 Notes
Spring 2006
All Prices are DELAYED by a minimum of 15 minutes.
AUD
Expiry Bid
Ask Open High Low Last
Trade
Sep 06 0.7501 0.7505
Dec 06 0.7490 0.7494
Mar 07
Jun 07
-7-
Last
Trade
Date
18/7/06
Last Change Traded Previous
Trade
Volume Settlement
Time
10:49
0.7493
0.7468
0.7468
0.7468
FNC 470 – Moore
Chapter 8 Notes
Spring 2006
Uses of Currency Future’s Contracts
1.
Suppose you are due to receive $AU 1,000,000 from a customer
on the date the September 2006 future’s contract is due to expire.
The current spot price (US direct quote) is $0.7512 and the
September futures is selling at $0.7499. Do you want to go long
or short in the contract to hedge your currency risk? How many
contracts?
2.
Assume the above information. How much did you pay for
“insurance” to guarantee your ultimate selling price?
3.
Assume that the spot rate on the settlement date is $0.7553.
How much did you gain or lose on the future’s contract? How
much did you gain or lose on the foreign exchange transaction
with your customer? How much is your net gain or loss?
4.
Now, assume that the spot rate on the settlement date is $0.7453.
How much did you gain or lose on the future’s contract? How
much did you gain or lose on the foreign exchange transaction
with your customer? How much is your net gain or loss?
-8-
FNC 470 – Moore
Chapter 8 Notes
Spring 2006
Options on Futures
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 future’s contract at a fixed
exchange rate for a
fixed time period.
5.
Expiration Dates of Currency Options:
a.
American
Exercise date may occur any time up to the expiration
date.
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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FNC 470 – Moore
Chapter 8 Notes
Spring 2006
Example of Australian Dollar Options on Future’s
PIT OPTIONS
CME Australian Dollar Options
Pit-Traded prices as of 02/27/06 12:50 pm (cst)
MTH/
STRIKE
OPEN
--- SESSION --HIGH
LOW
ZA MAR06 CME AUSTRALIAN DOLLAR OPTIONS
7050
---------7100
---------7250
---------7300
---------7350
---------7400
------.200A
7450
.050
.050
.050
7500
---------7550
---------7600
---------7650
---------7700
---------7750
---------7800
---------7900
---------8300
---------ZA APR06
7400
7450
7500
LAST
SETT
PT
CHGE
---- PRIOR DAY ---SETT
VOL
INT
CALL (Cents per Australian Dollar)
------UNCH
3.400
------UNCH
2.900
------UNCH
1.430
------UNCH
.960
------UNCH
.540
.200A
----5
.250
.050
----6
5
.110
------UNCH
5
.050
------UNCH
.020
------UNCH
.010
------UNCH
.005
------UNCH
CAB
------UNCH
CAB
------UNCH
CAB
------UNCH
CAB
------UNCH
CAB
AUSTRALIAN DOLLAR OPTIONS CALL
------------------.440A
.440A
-------------
----------
UNCH
-6
UNCH
ZA JUN06 AUSTRALIAN DOLLAR OPTIONS CALL
7400
1.120
1.120
1.120
1.120
7500
------.720A
.720A
7600
------------7700
------------7900
.100
.100
.100
.100
8000
-------------
-------------------
-8
-8
UNCH
UNCH
-1
UNCH
- 10 -
EST
VOL
.700
.500
.340
5
5
1.200
.800
.500
.310
.110
.060
20
63
63
69
46
29
79
62
221
178
7
70
9
33
43
7
10
10
3
7
10
10
53
95
3
6
284
21
10
FNC 470 – Moore
Chapter 8 Notes
Spring 2006
PIT OPTIONS
CME Australian Dollar Options
Pit-Traded prices as of 02/27/06 12:50 pm (cst)
MTH/
STRIKE
OPEN
--- SESSION --HIGH
LOW
LAST
SETT
PT
CHGE
EST
VOL
---- PRIOR DAY ---SETT
VOL
INT
ZA MAR06 AUSTRALIAN DOLLAR OPTIONS PUT (cents per Australian Dollar)
7000
---------------UNCH
CAB
7050
---------------UNCH
CAB
7100
---------------UNCH
.005
7150
---------------UNCH
.010
7200
---------------UNCH
.015
7250
---------------UNCH
.030
7300
---------------UNCH
.060
7350
---.150B
---.150B
---+1
.140
7400
---.400B
---.400B
---+5
.350
7450
---------------UNCH
.710
7500
1.300
1.300
1.300
1.300
---+15
5
1.150
7550
---------------UNCH
1.620
7600
---------------UNCH
2.110
ZA APR06
7300
7400
AUSTRALIAN DOLLAR OPTIONS PUT
-------------------------
-------
UNCH
UNCH
.490
.930
ZA JUN06
7100
7200
7400
AUSTRALIAN DOLLAR OPTIONS PUT
-------------------------------------
----------
UNCH
UNCH
UNCH
.410
.640
1.430
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1
2
10
1
1
115
1
40
1
120
58
328
202
155
59
3
10
10
38
203
1
FNC 470 – Moore
Chapter 8 Notes
Spring 2006
Uses of Currency Options on Future’s Contracts
1.
Suppose you are due to receive $AU 1,000,000 from a customer
on the date the March 2006 future’s contract is due to expire. The
current spot price (US direct quote) is $0.7383 and the March
futures is selling at $0.7380. Do you want to buy a call or put
with a $0.7400 strike price in the contract to hedge your currency
risk? How many contracts?
2.
Assume the above information. How much did you pay for
“insurance” to guarantee your ultimate selling price?
3.
Assume that the spot rate on the settlement date is $0.7353.
How much did you gain or lose on the future’s contract? How
much did you gain or lose on the foreign exchange transaction
with your customer? How much is your net gain or loss?
4.
Now, assume that the spot rate on the settlement date is $0.7453.
How much did you gain or lose on the future’s contract? How
much did you gain or lose on the foreign exchange transaction
with your customer? How much is your net gain or loss?
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