currency futures and options_final

7/31/2019 Currency Futures and Options_Final

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Introduction

Forwards, futures, and options arecollectively known as derivatives

What is a derivative?

Why are derivatives useful?They help eliminate the price risk inherent in

transactions that call for future delivery ofmoney, security, or a commodity.


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Currency Futures &

Options Markets


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Objectives: to Understand

The nature of currency futures and optionscontracts and how they are used to managecurrency risk & to speculate on futurecurrency movements

The difference between forward & futurescontracts

The difference between futures & optionscontracts

The factors that determine the value of anoption


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Currency Futures


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Currency futures


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What is currency futures

A transferable futures contract that specifies

the price at which a specified currency can

be bought or sold at a future date. Currencyfuture contracts allow investors to hedge

against foreign exchange risk.


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History

of Currency futures Currency futures were first created at the

Chicago Mercantile Exchange (CME) in

1972 International Monetary Market(IMM)

launched trading in seven currency futures

on May 16, 1972.
http://www.answers.com/topic/chicago-mercantile-exchangehttp://www.answers.com/topic/1972http://en.wikipedia.org/wiki/International_Monetary_Markethttp://en.wikipedia.org/wiki/May_16http://en.wikipedia.org/wiki/1972http://en.wikipedia.org/wiki/1972http://en.wikipedia.org/wiki/May_16http://en.wikipedia.org/wiki/International_Monetary_Markethttp://www.answers.com/topic/1972http://www.answers.com/topic/chicago-mercantile-exchange


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Currency futures in India

Currency futures trading was started in Mumbai August29, 2008.

With over 300 trading members including 11 banks

registered in this segment, the first day saw a very livelycounter, with nearly 70,000 contracts being traded.

The first trade on the NSE was by East India Securities Ltd

Amongst the banks, HDFC Bank carried out the first trade.The largest trade was by Standard Chartered Bank

constituting 15,000 contracts. Banks contributed 40percent of the total gross volume.


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Fundamentals of Indian currency

futures Currency futures can be traded between Indian

rupees and US dollar (US$ -- INR)

The trading of Indian currency futures can bedone between 9 am to 5 pm

The minimum size of currency futures is US$1000 periodically the value of the contract can

be changed by RBI and SEBI The currency future can have maximum validity

of 12 months

The currency futures contract can be settled in

cash


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Trade exchanges for currency

futures There are 3 trade exchange that trades in

currency futures

1. National Stock Exchange (NSE)

2. Bombay Stock Exchange (BSE)

3. Multi-Commodity Exchange (MCX)


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Futures Contracts

A futures contract is an agreement to buy or sell a

specified quantity of a specified asset at a certain

point in the future at a price agreed upon today In the case of currencies, it is an agreement to

buy/sell a specified quantity of a specific currency

at a pre agreed upon exchange rate at a certain

time in the future


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Meaning

It is a derivative instrument

Definition is the same as currency forward

Forwards are traded over the counter Futures are traded in organised exchanges

(separate financial futures exchanges)

Futures are transacted through brokers Traded only in a limited number of currencies


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Features

Standardised terms

Clearing house

Margin system

Closing of futures


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Standardised terms

Contract size is standardised

Example: 62,500 Sterling; 125,000 Euro;

100,000 Can DollarChicago Mercantileexchange

Date of delivery is predetermined

Third Wednesday of Jan, March, April,

June, July, Sept., Oct., Dec.


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Clearing house

Each exchange has a clearing house

Clearing house arranges for delivery of asset and

payment of money Clearing house becomes the counter party to theoriginal parties Original parties: buyer and seller

Clearing house becomes counter party to buyer (todeliver the asset)

Clearing house becomes the counter party to the seller(to make payment)


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A. Margin

Sometimes called the deposit, the

margin represents security to cover any

loss in the market value of the contractthat may result from adverse price

changes. This is the cost of trading in

the futures market.


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Margin system

There are 3 types of margins

Initial margin, maintenance margin and variation

margin Initial margin to be paid upfront

Balance is marked to the market every day

Maintenance margin to be maintained throughout

the duration of the contract Variation margin (shortfall in margin) to be

remitted promptly


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Example for margin system

Can Dollar futures: size = 100,000 Can D

Dealer buys one contract at USD 0.75/ Can D

Value of contract: USD 75,000 Initial margin: 10 percent = USD 7,500

Maintenance margin: 7.5 percent = USD 5,625

Price moves upto USD 0.755/ Can D: dealer gains

USD 500 (100,000 * USD 0.005) Price moves down to USD 0.740: dealer loses

USD 1000 (100,000*USD 0.010)


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FUTURES CONTRACTS

Available Futures Currencies:

1.) British pound 5.) Euro

2.) Canadian dollar 6.) Japanese yen

3.) Deutsche mark 7.) Australian dollar

4.) Swiss franc


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Currency Futures Market

The contracts can be traded by firms or

individuals through brokers on the trading

floor of an exchange (e.g. ChicagoMercantile Exchange), automated trading

systems (e.g. GLOBEX), or the over-the-

counter market.

Brokers who fulfill orders to buy or sell

futures contracts typically charge a

commission.


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FUTURES CONTRACTS

B. Forward vs. Futures Contracts

Basic differences:

1. Trading Locations 6. SettlementDate

2. Regulation 7. Quotes

3. Frequency of 8. Transactiondelivery costs

4. Size of contract 9. Margins

5. Delivery dates 10. Credit risk

F t d F d A


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Futures and Forwards: A

Comparison Table

Default Risk: Borne by Clearinghouse Borne by Counter-Parties

What to Trade: Standardized Negotiable

The Forward/Futures Agreed on at Time Agreed on at Time

Price of Trade Then, of Trade. Payment at

Marked-to-Market Contract Termination

Where to Trade: Standardized Negotiable

When to Trade: Standardized Negotiable

Liquidity Risk: Clearinghouse Makes it Cannot Exit as Easily:

Easy to Exit Commitment Must Make an Entire

New Contrtact

How Much to Trade: Standardized Negotiable

What Type to Trade: Standardized Negotiable

Margin Required Collateral is negotiable

Typical Holding Pd. Offset prior to delivery Delivery takes place

Futures Forwards

Comparison of the Forward & Futures


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Delivery date Customized Standardized

Participants Banks, brokers, Banks, brokers,MNCs. Public MNCs. Qualifiedspeculation not public speculation

encouraged. encouraged.

Security Compensating Small securitydeposit bank balances or deposit required.

credit lines needed.

Clearing Handled by Handled byoperation individual banks exchange

& brokers. clearinghouse.Daily settlementsto market prices.

Comparison of the Forward & FuturesMarketsForward Markets Futures Markets

Contract size Customized Standardized

Comparison of the Forward & Futures


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Regulation Self-regulating Commodity

Futures TradingCommission,

National FuturesAssociation.

Liquidation Mostly settled by Mostly settled byactual delivery. offset.

Transaction Banks bid/ask NegotiatedCosts spread. brokerage fees.

Comparison of the Forward & FuturesMarkets

Forward Markets Futures Markets

Marketplace Worldwide Central exchangetelephone floor with worldwidenetwork communications.


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Enforced by potential arbitrage activities,

the prices of currency futures are closely

related to their corresponding forward ratesand spot rates.

Currency futures contracts are guaranteed

by the exchange clearinghouse, which inturn minimizes its own credit risk by

imposing margin requirements on those

market participants who take a position.



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Speculators often sell currency futures

when they expect the underlying

currency to depreciate, and vice versa.


1. Contract to sell 500,000pesos @ $.09/peso($45,000) on June 17.

April 4

2. Buy 500,000 pesos @ $.08/peso($40,000) from the spot market.

June 17

3. Sell the pesos to fulfill contract.Gain $5,000.


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MNCs may purchase currency futures to

hedge their foreign currency payables, or

sell currency futures to hedge their

receivables.


1. Expect to receive 500,000pesos. Contract to sell 500,000pesos @ $.09/peso on June17.

April 4

2. Receive 500,000 pesos asexpected.

June 17

3. Sell the pesos at the locked-inrate.


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Holders of futures contracts can close out

their positions by selling similar futures

contracts. Sellers may also close out theirpositions by purchasing similar contracts.


1. Contract to buy

A$100,000 @$.53/A$ ($53,000) onMarch 19.

January 10

3. Incurs $3000 loss from

offsetting positions infutures contracts.

March 19

2. Contract to sell

A$100,000 @$.50/A$ ($50,000) onMarch 19.

February 15


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FUTURES CONTRACTS

Maximum price movementsContracts set to a daily price limit restricting maximum

daily price movements.

If limit is reached, a margin call may be necessary to

maintain a minimum margin

Transaction costs:

payment of commission to a trader Leverage is high

Initial margin required is relatively low (e.g. less than.02% of sterling contract value).


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Currency futures contracts specify a

standard volume of a particular currency to

be exchanged on a specific settlement date. They are used by MNCs to hedge their

currency positions, and by speculators who

hope to capitalize on their expectations of

exchange rate movements.


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A. Forward vs. Futures Markets

(continued) Assume initial margin was $1400 and

maintenance margin is $1100. A has already

sustained a loss of $150 so the value of the

margin account is $1250. If the price drops the

following day another $200 loss is registered.

The value of the margin account is down to

$1050, below the maintenance margin. This

means A will be required to bring the margin

account back to $1400.


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B. Speculating

Assume a speculator buys a JUNE contract

at $459.40 by depositing the required

margin of $3,500. One gold contract = 100 troy ounces, it has

a market value of $45,940.

Hence margin is: $3,500/45,940 = 7.62%


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B. Speculating (continued)

1. If Gold contract goes up to $500/ounce

by May, then:

Profit = $500 - $459.40 = $40.60*100Return = $4060/$3500 = 116%

2. If Gold contract goes down to

$410.00/ounce by May, then:Profit = $410 - $459.40 = - 49.40*100

- 4940/3500 = -1.41 or

Return = 141%


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B. Speculating (continued)

3. Assume the speculator shorts by

selling the JUNE contract. If price

decreases then:Receives: (459.40 - 410) = 49.40*100

Profit: $4940

Return: 4940/3500 = +141%


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FUTURES CONTRACTS

Advantages of futures:

1.) Smaller

contract size2.) Easy liquidation

3.) Well- organized

and stablemarket.

Disadvantages of futures:

1.) Limited to 7

currencies2.) Limited dates

of delivery

3.) Rigid contractsizes.


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B. Purposes of Futures Markets

Meets the needs of three groups of futures

market users:

1. Those who wish to discover informationabout future prices of commodities (suppliers)

2. Those who wish to speculate (speculators)

3. Those who wish to transfer risk to some

other party (hedgers)


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Currency Futures

Performance Bond or Initial Margin: Thecustomer must put up funds to guarantee thefulfillment of the contract - cash, letter of

credit, Treasuries. Maintenance Performance Bond or Margin:

The minimum amount the performance bondcan fall to before being fully replenished.

Mark-to-the-market: A daily settlementprocedure that marks profits or lossesincurred on the futures to the customersmargin account.


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Sample Performance BondRequirements

From the CME, 15 March 2000

Currency Futures Initial MaintenanceAustralian Dollar $1,317 $975British Pound $1,620 $1,200Canadian Dollar $642 $475Deutsche Mark $1,249 $925Euro $2,430 $1,800


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Long and Short Exposures

A person that is, for example, long the pound,has pound denominated assets that exceed

in value their pound denominated liabilities. A person that is short the pound, has pound

denominated liabilities that exceed in valuetheir pound denominated assets.


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Hedging With a Currency

Future To hedge a foreign exchange exposure, thecustomer assumes a position in the oppositedirection of the exposure.

For example, if the customer is long thepound, they would short the futures market.

A customer that is long in the futures marketis betting on an increase in the value of thecurrency, whereas with a short position theyare betting on a decrease in the value of thecurrency.


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How an Order is Executed (Figure from the CME)


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Corporate Use of Currency

Futures Hedge open positions in foreign currencies by

buying/selling currency futures

Foreign currency cash inflows Risk: domestic currency may appreciate

Strategy: sell foreign currency in the futures market at

the futures exchange rate (Short)

Foreign currency cash outflows Risk: domestic currency may depreciate

Strategy: buy foreign currency in the futures market at

the futures exchange rate (Long)


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A. Reading Futures Prices

(Contracts)1. The Product

2. The Exchange

3. Size of the Contract

4. Method of Valuing Contract

5. The delivery month


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A. Reading Futures Prices

(Prices)1. Opening

2. High

3. Low

4. Settlement

Price at which the contracts are settled at the

close of trading for the day Typically the last trading price for the day


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B. The Basis

...is the current cash price of a particular

commodity minus the price of a futures

contract for the same commodity. BASIS = CURRENT CASH PRICEFP

FPfuture price


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B. The Basis (continued)

Example: Gold Prices and the Basis:

12/16/03

BasisCash $441.00

DEC 441.50 -.50

MAR 04 449.20 - $7.70

JUN 459.40 -$17.90SEP 469.90 -$28.40

DEC 480.70 -$39.20

MAR 05 491.80 -$50.30


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B. The Basis (continued)

1. Relation between Cash & Futures

2. Spreads

The difference between two futures

prices (same type of contract) at two

different points in time


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C. Spreading

Combining two or more different

contracts into one investment

position that offers the potential for

generating a modest profit


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C. Spreading (continued)

Ex: Buy 1 Corn contract at 258

Sell (short) 1 Corn contract at 270

Close out by: 1. Selling the long contract at 264

2. Buy a short contract at 273

Profit: Long: 264-258 = 6

Short: 270-273 = -3

Profit: = 6 -3 = 3

3 * 5000 bu. = $150 Net


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Currency Options


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CURRENCY OPTIONS

Definition:

a contract from a writer ( the seller) that

gives the right not the obligation to theholder (the buyer) to buy or sell a standard

amount of an available currency at a fixed

exchange rate for a fixed time period.


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CURRENCY OPTIONS

Types of Currency Options:

a. American

exercise date may occur anytime up to the expiration date.

b. European

exercise date occurs only at theexpiration date.


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CURRENCY OPTIONS

Exercise Price

a. Sometimes known as the

strike price.

b. the exchange rate at which theoption holder can buy or sellthe contracted currency.


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CURRENCY OPTIONS

Status of an option

a. In-the-money

Call: Spot > strikePut: Spot < strike

b. Out-of-the-moneyCall: Spot < strike

Put: Spot > strike

c. At-the-moneySpot = the strike


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CURRENCY OPTIONS

The premium: the price of an

option that the writer charges thebuyer.


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CURRENCY OPTIONSWhen to Use Currency Options

1. For the firm hedging foreignexchange risk

a. With sizable unrealized gains.b. With foreign currency flows

forthcoming.

2. For speculators- profit from favorable exchange rate

changes.


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CURRENCY OPTIONS

Option Pricing and Valuation

1. Value of an option equals

a. Intrinsic valueb. Time value

2. Intrinsic Value

- the amount in-the-money3. Time Value - the amount the option is

in excess of its intrinsic value.


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CURRENCY OPTIONS

2. Intrinsic Value

the amount in-the-money

3. Time Value

the amount the option is in

excess of its intrinsic value.


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CURRENCY OPTIONS

4. Other factors affecting the value of an option

a. value rises with longertime to expiration.

b. value rises when greater volatility in theexchange rate.

5. Value is complicated by both the home and foreign

interest

rates.


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CURRENCY OPTIONS

E. Market Structure

1. Location

a. Organized Exchanges

b. Over-the-counter

1.) Two levelsretail and wholesale


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Currency Options

A currency option is a contract that givesthe owner the right, but not the obligation, tobuy or sell a currency at a specified price at

or during a given time. Call Option: An option that gives the owner

the right to buy a currency.

Put Option: An option that gives the ownerthe right to sell a currency.

How are currency options simultaneouslyboth put & call options?


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Currency Options

American Option: An option that canbe exercised any time before or on theexpiration date.

European Option: An option that canonly be exercised on the expirationdate.


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Currency Options

Exercise orStrike Price: The price (spotexchange rate) at which the option may beexercised.

Option Premium: The amount that must bepaid to purchase the option contract.

Break-Even: The point at which exercising

the option exactly matches the premium paid.


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Currency Options

If the spot rate has not yet reached theexercise price [SX], the option is said to be in themoney.


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Call Option

The holder of a call option expects theunderlying currency to appreciate in value.

Consider 4 call options on the euro, with astrike price of 92 ($/) and a premium of 0.94(both cents per).

The face amount of a euro option is 62,500.

The total premium is:

$0.0094462,500=$2,350.

C ll O ti H th ti l P Off


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Profit

Loss

88.15

92 92.94

93.5

Payoff Profile

Spot Rate

-$2,350

-$1,100

0

$1,400

Out-of-

the-money At In-the-money

Call Option: Hypothetical Pay-Off

92.5

Break-Even


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Put Option

The holder of a put option expects theunderlying currency to depreciate in value.

Consider 8 put options on the euro with astrike of 90 ($/) and a premium of 1.95 (bothcents per).

The face amount of a euro option is 62,500.

The total premium is:

$0.0195862,500=$9,750.

Put Option: Hypothetical payoff


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Profit

Loss

88.05 90

Payoff Profile

Spot Rate

-$9,750

-$5000

In-the-money At Out-of-the-money

Put Option: Hypothetical payoff

at a spot rate of 88.15

88.15

Break-Even


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Option Pricing & Valuation

Value of a call option at maturity S-X, where S-X>0 [otherwise value is

zero], = Intrinsic value

Value of a call option prior to maturity Intrinsic value + Time value

Time Value is a function of:

Time to expiration, volatility, domestic &foreign interest rate differentials


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Comparing Futures and OptionsThe value of a futures contract at maturity (date t+n) to purchase one

unit of foreign currency will be:

Value

0 St+n

The value of the futures contractis zero at maturity if the spot rateat maturity is equal to the current

futures rate.

Zt,t+n


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But were missing something. While a futures contract has an

expected return of zero, the value of the option looks like it is

always positive

Value

0 St+nX


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Hence, anyone taking the opposite side of the transaction

(writing the option) will demand a price (C) that makes the

expected value zero once again:

Value

0 St+n

Regardless of the outcome,the options value is reduced

everywhere by the certainpayment of its price.

XC


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The value of an option to sell one unit of foreign currency (a

put option) at a strike price equal to a corresponding futures

contract price will have similar properties:

Value

0 St+nX


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Foreign Currency Swaps

A currency swap is an exchange of debt-service

obligations denominated in one currency for the

service on an agreed upon principal amount of debt

denominated in another currency.A currency swap is often the low-cost way of

obtaining a liability in a currency in which a firm has

difficulty borrowing.

A pair of firms simply borrow in currencies they have

relative advantage borrowing in, and then trade the

obligations of their respective loans, thereby

effectively borrowing in their desired currency.


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Dell

SFr

Dell computers would like to borrow in Swiss Francsto hedge its ongoing cash flows from that country


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Dell Nestle

SFr$

Nestle would like to borrow in Dollars to hedge itssales to the U.S...


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Dell Nestle

SFr$

But both firms are relatively unknown to the respectivecredit markets, and thus anticipate unfavorableborrowing terms.


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Dell Nestle

I-Bank SFr$

But an investment bank comes along and suggeststhat each borrow in the credit markets that arecomfortable with them...


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Dell Nestle

SFr$

and then the investment bank will give them

sufficient cash flows each period to cover theobligations of these loans...

$ Sfr

I-Bank


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Dell Nestle

SFr$

in return for making the payments in the foreign

currency that exactly match the other firms

obligations.

$ Sfr

Sfr $

I-Bank


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I-Bank

Dell Nestle

SFr$

In other words, the swap effectively completes themarket. Giving each firm access to the foreign debtmarket at reasonable terms.

$ Sfr

Sfr $


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The All-In Cost of a Swap

Clearly, the relative magnitudes of the respectivepayments determine each firms ultimate cost of

borrowing.

This cost is called the all-in cost. It is the effectiveinterest rate the firm ends up paying on the moneythat it raised.

It is the discount rate that equates the NPV of future

interest and principal payments to the net proceedsreceived by the issuer.

IRR


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Swaps vs. Forwards

Notice that on a one-year loan, a currency swap isno different than a one-year forward contract.

In fact, a currency swap can really be thought of as

a firm taking a domestic currency loan andpurchasing a series of forward contracts to convertthe payments into known foreign currencyobligations.

The implied forward rates need not equal the actualforward rates, but taken as a whole, shouldresemble an average forward rate over the term ofthe loan.


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Key Points

4. Futures contracts, traded on highly liquid exchanges, havethe benefit that they can be sold on the market before thematurity date. As a result, futures contracts are particularlyuseful for hedging exposures whose maturity is uncertain.

5. On the other hand, futures contracts are standardized interms of timing and quantities, and therefore they rarely offer aperfect hedge.

6. Options contracts allow a firm to hedge against movementsin one direction while retaining exposure in the other.

7. Options are particularly useful in hedging exposures that arehighly uncertain with respect to timing and magnitude.


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Key Points

8. Currency swaps offer firms the ability to borrow againstlong-term foreign currency exposures when access to foreigndebt markets is costly.

9. Currency swaps converts a domestic liability into a

foreign one via what are effectively a bundle of long-datedforward contracts between two firms.

10. The effective cost of a currency swap is its all-in cost -the effective rate of interest that the firm ends up paying onthe constructed foreign liability.

11. Currency swaps require only that firms have differentialrelative - rather than absolute - advantage in accessing debtmarkets.


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Currency Options Market

Currency options provide the right to

purchase or sell currencies at specified

prices. They are classified as calls or puts.

Standardized options are traded on

exchanges through brokers.

Customized options offered by brokerage

firms and commercial banks are traded inthe over-the-counter market.


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A currency call option grants the holder the right to buy a

specific currency at a specific price (called the exercise or

strike price) within a specific period of time.

A call option is

in the money if exchange rate > strike price,

at the money if exchange rate = strike price,

out of the money

if exchange rate < strike price.

Currency Call Options


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Option owners can sell or exercise their

options, or let their options expire.

Call option premiums will be higher when:

(spot pricestrike price) is larger;

the time to expiration date is longer; and

the variability of the currency is greater.

Firms may purchase currency call options

to hedge payables, project bidding, or target

bidding.



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Speculators may purchase call options on a

currency that they expect to appreciate.

Profit = selling(spot)priceoptionpremium

buying(strike)price

At breakeven, profit = 0.

They may also sell (write) call options on a

currency that they expect to depreciate.

Profit = optionpremiumbuying(spot)price +

selling(strike)price



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A currency put option grants the holder the right to sell a

specific currency at a specific price (the strike price) within

a specific period of time.

A put option is

in the money if exchange rate < strike price,

at the money if exchange rate = strike price,

out of the money

if exchange rate > strike price.

Currency Put Options


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Put option premiums will be higher when:

(strike pricespot rate) is larger;

the time to expiration date is longer; and

the variability of the currency is greater.

Firms may purchase currency put options to

hedge future receivables.



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One possible speculative strategy for

volatile currencies is to purchase both a put

option and a call option at the same exercise

price. This is called a straddle.

By purchasing both options, the speculator

may gain if the currency moves

substantially in either direction, or if it

moves in one direction followed by the

other.


Efficiency of


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Efficiency ofCurrency Futures and Options

If foreign exchange markets are efficient,

speculation in the currency futures and

options markets should not consistently

generate abnormally large profits.

http://www.ino.com/Currency quotes

Contingency Graphs for Currency Options
http://www.ino.com/http://www.ino.com/


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+$.02

+$.04

$.02

$.04

0

$1.46 $1.50 $1.54

Net Profitper Unit

FutureSpotRate

For Buyer of Call Option

Strike price = $1.50Premium = $ .02

+$.02

+$.04

$.02

$.04

0

$1.46 $1.50 $1.54

Net Profitper Unit

FutureSpotRate

For Seller of Call Option




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+$.02

+$.04

$.02

$.04

0

$1.46 $1.50 $1.54

Net Profitper Unit

FutureSpotRate

For Seller of Put Option


+$.02

+$.04

$.02

$.04

0

$1.46 $1.50 $1.54

NetProfit per

Unit

Future SpotRate

For Buyer of Put Option



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Closing of futures

Forward contract is settled on delivery date by

delivery of asset and payment of money

Futures can be closed:

Exchange of asset and cash on delivery date

Cash settlement through a reverse trade on any day

Hedgers prefer exchange of asset; speculators

prefer cash settlement


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Hedging with currency futures

Importer buys the required currency futurescontract

Thus locks in a price for the purchase of foreign

currency Hedges (avoids) risk due to exchange rate

fluctuations

Exporter sells the expected currency futurescontract

locks in a price for the sale

Hedges risk due to exchange rate fluctuations

Imperfections in hedging with


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currency futures

Maturity mismatch

Mismatch in maturity date of futures contract and date

of cash transaction

Size mismatch

Mismatch between size of futures contract and size of

cash transaction

Maturity and size mismatch Hedging with currency futures may not result in

perfect hedge

Speculation with currency futuresFl i i h d


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Fluctuations in exchange rates used to reapspeculative profits

Spot rate: USD = Rs.46.40 1 month future rate: USD = Rs.46.60

Expected spot rate on maturity: USD = Rs. 46.75

Dealer buys one currency futures contract of size100,000 USD

Value of contract: Rs.46,60,000; Margin deposit:Rs.4,66,000

If exchange rate move up to Rs.46.75 asanticipated, dealer gains profit of Rs.15,000(100,000* Re.0.15)

Rate of return: (15000/466,000)(12)(100) =

38.63%

Speculation through cash


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Speculation through cash

transaction Spot rate: USD = Rs.46.40 Dealer buys 100,000 USD at spot rate

Investment required: Rs.46,40,000

If exchange rate moves upto Rs.46.75 within amonth, dealer gains profit of Rs.35,000 (100,000*Re.0.35)

Rate of return: (35000/46,40,000)(12)(100) =9.05%

Speculation with currency futures - larger

currency futures and options_final

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