EECS 3101 Lecture Notes - Lecture 33: Futures Exchange
28 Jun 2018
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EECS 3101 Lecture 33 Notes
Introduction
Currency futures market
The preceding examples demonstrate that, even though an NDF does not involve
delivery, it can effectively hedge the future foreign currency payments anticipated by an
MNC.
Because an NDF can specify that any payments between the two parties be in dollars or
some other available currency, firms can also use NDFs to hedge existing positions of
foreign currencies that are not convertible.
Consider an MNC that expects to receive payment in a foreign currency that cannot be
converted into dollars.
The MNC may use this currency to make purchases in the local country, but it may
nonetheless desire to hedge against a decline in the value of that currency over the
period before it receives payment.
Hence the MNC takes a sell position in an NDF and uses the closing exchange rate of
that currency (as of the settlement date) as the reference index.
If the currency depreciates against the dollar over time, then the firm will receive the
difference between the dollar value of the position when the NDF contract was created
and the dollar value of the position as of the settlement date.
It will therefore receive a payment in dollars from the NDF to offset any depreciation in
the currency over the period of concern.
Currency futures contracts are contracts specifying a standard volume of a particular
currency to be exchanged on a specific settlement date.
Thus currency futures contracts are similar to forward contracts in terms of their
obligation, but they differ from forward contracts in how they are traded.
These contracts are frequently used by MNCs to hedge their foreign currency positions.
In addition, they are traded by speculators who hope to capitalize on their expectations
of exchange rate movements.
Document Summary
The preceding examples demonstrate that, even though an ndf does not involve delivery, it can effectively hedge the future foreign currency payments anticipated by an. Thus currency futures contracts are similar to forward contracts in terms of their obligation, but they differ from forward contracts in how they are traded. These contracts are frequently used by mncs to hedge their foreign currency positions. In addition, they are traded by speculators who hope to capitalize on their expectations of exchange rate movements. Preceding examples demonstrate that, even though an ndf does not involve delivery, it can effectively hedge the future foreign currency payments anticipated by an mnc. Because an ndf can specify that any payments between the two parties be in dollars or some other available currency, firms can also use ndfs to hedge existing positions of foreign currencies that are not convertible. Consider an mnc that expects to receive payment in a foreign currency that cannot be converted into dollars.
