Shapiro: Chapter 7
Currency Futures
and Options Markets
Chapter 7 Problems
1, 5, 8
Forward vs. Futures
Contracts: A Comparison
Features
Forwards
Futures
Features
Terms
Forwards
Futures
Negotiated
Standardized
Features
Forwards
Futures
Terms
Negotiated
Standardized
Listing
Unlisted
Exchange
Features
Forwards
Futures
Terms
Negotiated
Standardized
Listing
Unlisted
Exchange
Unlimited
Fixed
Size
Features
Forwards
Futures
Terms
Negotiated
Standardized
Listing
Unlisted
Exchange
Size
Unlimited
Fixed
Maturity
Negotiated
Standardized
Features
Forwards
Futures
Terms
Negotiated
Standardized
Listing
Unlisted
Exchange
Size
Unlimited
Fixed
Maturity
Negotiated
Standardized
Currency
Unlimited
Limited
Features
Forwards
Futures
Terms
Negotiated
Standardized
Listing
Unlisted
Exchange
Size
Unlimited
Fixed
Maturity
Negotiated
Standardized
Currency
Unlimited
Limited
Trading Volume
Not Traded
Actively
Features
Forwards
Futures
Terms
Negotiated
Standardized
Listing
Unlisted
Exchange
Size
Unlimited
Fixed
Maturity
Negotiated
Standardized
Currency
Unlimited
Limited
Trading Volume
Not Traded
Actively
Low
High
Liquidity
Features
Forwards
Futures
Terms
Negotiated
Standardized
Listing
Unlisted
Exchange
Size
Unlimited
Fixed
Maturity
Negotiated
Standardized
Currency
Unlimited
Limited
Trading Volume
Not Traded
Actively
Low
High
Default Risk
Guaranteed
Liquidity
Performance
Features
Forwards
Futures
Terms
Negotiated
Standardized
Listing
Unlisted
Exchange
Size
Unlimited
Fixed
Maturity
Negotiated
Standardized
Currency
Unlimited
Limited
Trading Volume
Not Traded
Actively
Low
High
Default Risk
Guaranteed
None
Required
Liquidity
Performance
Margin
Features
Forwards
Futures
Terms
Negotiated
Standardized
Listing
Unlisted
Exchange
Size
Unlimited
Fixed
Maturity
Negotiated
Standardized
Currency
Unlimited
Limited
Trading Volume
Not Traded
Actively
Low
High
Default Risk
Guaranteed
None
Required
Maturity
Daily
Liquidity
Performance
Margin
Settlement
Currency Futures Contracts
Advantages:
Smaller
size of contract
Ability to liquidate position
Well-organized market
Currency Futures Contracts
Disadvantages:
Limited
–
currencies:
A$; R$; £; Can$; CZK; €; Ft; ¥; Mex$;
$NZ; NKr; PLN; Rb; R; SKr; SFr
Limited
delivery dates
Restricted contractual amounts
–
Example: £ 62,500
Currency Futures Contracts
Conclusion:
“...
mainly benefits firms with
stable and continuous payments
or receipts in the traded
currencies.”
Currency Futures Contracts
Currency Futures
Newspaper Listing
Chicago Mercantile
Exchange (CME)
www.cme.com
Shapiro: Problem 7.1
Time Action Taken
Monday
AM
[Shap6-1]
Buys pound futures
contract at £1=$1.95
Contract
Value
$121,875
Cash
Flow
None
Time Action Taken
[Shap6-1]
Monday
AM
Buys pound futures
Monday
Close
Futures price
rises to £1=$1.96
Contract
Value
$121,875
Cash
Flow
None
$122,500
+ $625.00
contract at £1=$1.95
Time Action Taken
[Shap6-1]
Contract
Value
$121,875
Cash
Flow
None
Monday
AM
Buys pound futures
Monday
Close
Futures price
rises to £1=$1.96
$122,500
+ $625.00
Tuesday
Close
Futures price
rises to £1=$1.98
$123,750
+ $1,250.00
contract at £1=$1.95
Time Action Taken
Cash
Flow
None
Monday
AM
Buys pound futures
Monday
Close
Futures price
rises to £1=$1.96
$122,500
+ $625.00
Tuesday
Close
Futures price
rises to £1=$1.98
$123,750
+ $1,250.00
Futures price
falls to £1=$1.955
$122,187.50
- $1,562.50
Wednesday
Close
[Shap6-1]
Contract
Value
$121,875
contract at £1=$1.95
Time Action Taken
Contract
Value
$121,875
Cash
Flow
None
Monday
AM
Buys pound futures
Monday
Close
Futures price
rises to £1=$1.96
$122,500
+ $625.00
Tuesday
Close
Futures price
rises to £1=$1.98
$123,750
+ $1,250.00
Futures price
falls to £1=$1.955
$122,187.50
- $1,562.50
Net Profit
+ $312.50
Wednesday
Close
contract at £1=$1.95
Currency Options
Currency Options
Forward
and futures contracts both protect against adverse
price movements, but ...
they eliminate the possibility of
gaining a profit from favorable
movements.
Option Pricing and Valuation
(Price = Intrinsic Value + Time Value)
Intrinsic
Value (IV):
IV = S - E, where
S = spot price, and
E = exercise price
if E > S, then IV = 0
Option Pricing and Valuation
(Price = Intrinsic Value + Time Value)
Time
Value (TV):
Excess of price over IV
TV = P - IV
Time value is always positive
Longer maturity, greater TV
“Wasting Asset” - TV declines to
zero at maturity
Currency Options
(Philadelphia Stock Exchange; 1983)
Buyer
(holder) has right to
sell (put) or buy (call) at
exercise (strike) price until
expiration date
Currency Options
(Philadelphia Stock Exchange; 1983)
Seller
must perform if exercised
Option buyer pays a premium
Option seller receives a premium
Currency Options
(Philadelphia Stock Exchange; 1983)
American
option - exercised
any time
European option - exercised
only at maturity
Currency Call Options
(Philadelphia Stock Exchange; 1983)
“in-the-money”
- spot price greater
than exercise price (S > E)
“out-of-the-money” - spot price
less than exercise price (S < E)
“at-the-money” - spot price is
equal to exercise price (S = E)
Currency Options Contracts
Currency Options
Newspaper Listing
Currency Options
Shapiro:
Exhibit 7.5
Shapiro: Problem 7-5
sells a €500,000 call
option at a premium of $0.04 per
Euro
Exercise price = $1.34
Expiration spot price = $1.36
Citigroup’s profit or loss?
Citigroup
Shapiro: Problem 7-5
Citigroup
receives:
€500,000 X $0.04 = $ 20,000
€500,000 X $1.34 = $670,000
Citigroup pays:
€500,000 X $1.36 = $680,000
Net gain (loss):
– $690,000 - $680,000 = $10,000
Shapiro: Problem 7.8
Apex
Corp. owes ¥125 million in
90 days.
Current spot rate : ¥1 = $0.007823
Shapiro: Problem 7.8
Apex
Corp. owes ¥ 125 million in 90
days.
Current spot rate : ¥1 = $0.007823
Low
Estimate
Most
Likely
High
Estimate
$0.0075
$0.0079
$0.0084
$937,500
$987,500
$1,050,000
Shapiro: Problem 7.8
What
is the risk facing Apex?
Is Apex “long” or “short”?
Shapiro: Problem 7.8
Commercial
Position
Hedge
Position
Shapiro: Problem 7.8
Commercial
Position
Short
(Owe)
Hedge
Position
Shapiro: Problem 7.8
Commercial
Position
Hedge
Position
Short
(Owe)
Long
(Buy)
Shapiro: Problem 7.8
Commercial
Position
Hedge
Position
Short
(Owe)
Long
(Buy)
Long
(Own)
Shapiro: Problem 7.8
Commercial
Position
Hedge
Position
Short
(Owe)
Long
(Buy)
Long
(Own)
Short
(Sell)
Shapiro: Problem 7.8
Options
(20 @ ¥6.25 million)
– spot rate:
¥1 = $0.0079(S)
– exercise price: ¥1 = $0.0080(E)
– S < E; no exercise
– loss of option premium
– ¥125,000,000 X $0.00015 =
$18,750
Shapiro: Problem 7.8
Futures:
(10 @ ¥12.5 million)
– buy Yen at ¥1 = $.00794
– spot rate: ¥1 = $.00790
– ¥125,000,000 X $.00004 =
$5,000