EECS 3101 Lecture Notes - Lecture 42: Spot Contract, Futures Contract, Futures Exchange
28 Jun 2018
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EECS 3101 Lecture 42 Notes
Introduction
Efficiency of the Currency Futures Market
If the spot rate has appreciated by this time in accordance with their expectations, then
this strategy will be profitable.
On that date, the speculators can purchase their pounds at the rate specified by the
futures contract and then sell these pounds at the spot rate.
Currency futures are also sold by speculators who expect that the spot rate of a
currency will be less than the rate at which they would be obligated to sell it.
EXAMPLE
Suppose that, as of April 4, a futures contract specifying 500,000 Mexican pesos and a
June settlement date is priced at $.09.
On April 4, speculators who expect the peso to decline sell futures contracts on pesos.
Assume that, on June 17 (the settlement date), the spot rate of the peso is $.08.
The transactions are shown in Exhibit 5.5 (once again, the margin deposited by the
speculators is not considered).
The gain on the futures position is $5,000, which represents the difference between the
amount received ($45,000) when selling the pesos in accordance with the futures
contract versus the amount paid ($40,000) for those pesos in the spot market.
Of course, expectations are often incorrect.
It is because of different expectations that, at any point in time, there will be some
speculators wanting to purchase futures contracts and other speculators wanting to sell
those same contracts.
If the currency futures market is efficient, then at any time the futures price for a
currency should reflect all available information.
That is, the price should represent an unbiased estimate of the currency’s spot rate on
the settlement date.
Document Summary
If the spot rate has appreciated by this time in accordance with their expectations, then this strategy will be profitable. If the currency futures market is efficient, then at any time the futures price for a currency should reflect all available information. That is, the price should represent an unbiased estimate of the currency"s spot rate on the settlement date. The spot rate has appreciated by this time in accordance with their expectations, and then this strategy will be profitable. On that date, the speculators can purchase their pounds at the rate specified by the futures contract and then sell these pounds at the spot rate. Currency futures are also sold by speculators who expect that the spot rate of a currency will be less than the rate at which they would be obligated to sell it. Suppose that, as of april 4, a futures contract specifying 500,000 mexican pesos and a.
