Futures and Optionson Foreign ExchangeChapter Five
ChapterObjective:This chapter discusses exchange-tradedcurrency futures contracts and optionscontracts
❖Chapter Objective: ❖This chapter discusses exchange-traded currency futures contracts and options contracts
Thebasics:Derivativeinstruments There are two fundamental classes of financialinstruments: underlying and derivative instrumentsThe value and payoffs ofderivatives are derivedfrom the behavior of the underlying instrumentsPaymentsaremadeinfutureHighleverageHigh riskDerivatives can be used to speculate, or gambleon future price movements,they canalso be usedto transfer risks.Derivatives transaction is a zero-sum game
The basics: Derivative instruments ❖There are two fundamental classes of financial instruments: underlying and derivative instruments ❖The value and payoffs of derivatives are derived from the behavior of the underlying instruments. ▪ Payments are made in future. ▪ High leverage ▪ High risk ❖Derivatives can be used to speculate, or gamble on future price movements, they can also be used to transfer risks. ❖Derivatives transaction is a zero-sum game
ChapterOutlineFutures Contracts:PreliminariesCurrencyFuturesMarketsOptionsContracts:PreliminariesCurrency Options MarketsBasic Option Pricing Relationships at ExpiryBinomial Option Pricing ModelEuropeanOptionPricingModelEmpirical Tests of Currency Option Models
Chapter Outline ❖Futures Contracts: Preliminaries ❖Currency Futures Markets ❖Options Contracts: Preliminaries ❖Currency Options Markets ❖Basic Option Pricing Relationships at Expiry ❖Binomial Option Pricing Model ❖European Option Pricing Model ❖Empirical Tests of Currency Option Models
Futures Contracts:PreliminariesA futures contract is like a forwardcontract:It specifies that a certain currency will beexchanged for another at a specified timein the future at prices specified todayA futures contract is different from aforward contract (exhibit 7.1) Futures are standardized contractstradingon organized exchanges with dailyresettlement through a clearinghouse
Futures Contracts: Preliminaries ❖A futures contract is like a forward contract: ▪ It specifies that a certain currency will be exchanged for another at a specified time in the future at prices specified today. ❖A futures contract is different from a forward contract (exhibit 7.1): ▪ Futures are standardized contracts trading on organized exchanges with daily resettlement through a clearinghouse