EECS 1541 Lecture Notes - Lecture 1: Spot Contract, Futures Contract, Call Option
22 Jun 2018
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EECS 1541 Lecture 1 Notes
Introduction
Standard volume
A currency futures contract specifies a standard volume of a particular currency to be
exchanged on a specific settlement date.
Some MNCs involved in international trade use the currency futures markets to hedge
their positions.
The futures rate is the exchange rate at which one can purchase or sell a specified
currency on the settlement date in accordance with the futures contract.
Thus, the futures rate’s role in a futures contract is analogous to the forward rate’s role
in a forward contract.
It is important to distinguish between the futures rate and the future spot rate.
The future spot rate is the spot rate that will exist at some future time and so, today,
that rate is uncertain.
If a U.S. firm needs Japanese yen in 90 days and if it expects the spot rate 90 days from
now to exceed the current 90-day futures rate (from a futures contract) or 90-day
forward rate (from a forward contract)
Then the firm should seriously consider hedging with a futures or forward contract.
Additional details on futures contracts, including other differences from forward
contracts
Currency Options Contracts Currency options contracts can be classified as calls or puts.
A currency call option provides the right to buy a specific currency at a specific price
(called the strike price or exercise price) within a specific period of time.
It is used to hedge future payables.
A currency put option provides the right to sell a specific currency at a specific price
within a specific period of time.
It is used to hedge future receivables. Currency call and put options can be purchased
on an exchange.
Document Summary
A currency futures contract specifies a standard volume of a particular currency to be exchanged on a specific settlement date. Some mncs involved in international trade use the currency futures markets to hedge their positions. A currency put option provides the right to sell a specific currency at a specific price within a specific period of time. Currency call and put options can be purchased on an exchange. They offer more flexibility than forward or futures contracts because they are not obligations. That is, the firm can elect not to exercise the option. Currency options have become a popular means of hedging. Mncs involved in international trade use the currency futures markets to hedge their positions. The futures rate is the exchange rate at which one can purchase or sell a specified currency on the settlement date in accordance with the futures contract.
