CHAPTERFuturesandOptionsonForeignExchange.docVIP

PAGE  PAGE 89 Eun/Resnick 4e CHAPTER 7 Futures and Options on Foreign Exchange Futures Contracts: Some Preliminaries Currency Futures Markets International Finance in Practice: CME Ramping Up FOREX Support, Targets OTC Business Basic Currency Futures Relationships Eurodollar Interest Rate Futures Contracts Options Contracts: Some Preliminaries Currency Options Markets Currency Futures Options Basic Option-Pricing Relationships at Expiration American Option-Pricing Relationships European Option-Pricing Relationships Binomial Option-Pricing Model European Option-Pricing Formula Empirical Tests of Currency Options Summary MINI CASE: The Options Speculator Futures Contracts: Some Preliminaries A CME contract on €125,000 with September delivery Is an example of a forward contract Is an example of a futures contract Is an example of a put option Is an example of a call option Answer: b) Rationale: options trade on the CBOE Yesterday, you entered into a futures contract to buy €62,500 at $1.20 per €. Suppose that the futures price closes today at $1.16. How much have you made/lost? Depends on your margin balance You have made $2,500.00 You have lost $2,500.00 You have neither made nor lost money, yet. Answer: c) Rationale: You have lost $0.04, 62,500 times for a total loss of $2,500 = $0.04/€ × €62,500 In reference to the futures market, a “speculator” attempts to profit from a change in the futures price wants to avoid price variation by locking in a purchase price of the underlying asset through a long position in the futures contract or a sales price through a short position in the futures contract stands ready to buy or sell contracts in unlimited quantity b) and c) Answer: a) Comparing “forward” and “futures” exchange contracts, we can say that: They are both “marked-to-market” daily. Their major difference is in the way the underlying asset is priced for future purchase or sale: futures settle daily and forwards settle at maturity. A futures contract is