Business Administration 4440Q/R/S/T Study Guide - Mexican Peso, Eurodollar, Foreign Exchange Spot
19 Apr 2014
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Chapter 9 futures and options on foreign exchange. Questions: explain the basic differences between the operation of a currency forward market and a futures market. Answer: the forward market is an otc market where the forward contract for purchase or sale of foreign currency is tailor-made between the client and its international bank. No money changes hands until the maturity date of the contract when delivery and receipt are typically made. A futures contract is an exchange-traded instrument with standardized features specifying contract size and delivery date. Futures contracts are marked-to-market daily to reflect changes in the settlement price. Delivery is seldom made in a futures market. Rather, a reversing trade is made to close out a long or short position. In order for a derivatives market to function, two types of economic agents are needed: hedgers and speculators. Answer: two types of market participants are necessary for the operation of a derivatives market: speculators and hedgers.
