Currency Derivatives Lecture Outline Forward Market How MNCs Can Use Forward Contracts Non-Deliverable Forward Contracts Currency Futures Market Contract Specifications Comparison of Currency Futures and Forward Contracts Pricing Currency Futures Closing Out a Futures Position Credit Risk of Currency Futures Contracts Speculation with Currency Futures How Firms Use Currency Futures Closing Out a Futures Position Transaction Costs of Currency Futures Currency Call Options Factors Affecting
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Attach/show your work for full credit. You are a trader in Brazil at the Bolsa exchange writing both Calls and Puts. Call and Put options are available on the US dollar with a strike of 2.2R/$ for a premia of .40R and .20R respectively. Assume each contract controls $100‚000. Be sure to draw the payoff and profit/loss diagrams before answering the questions. 1. Which breakeven point is correct? a. Call 2.0 b. Put 2.4 c. Call 2.4 d. Put 1.8 e. Put 2.0 2. If at maturity‚ the spot is 1.9R/$ at maturity
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Eun & Resnick 4e CHAPTER 8 Management of Transaction Exposure Three Types of Exposure Forward Market Hedge Money Market Hedge Options Market Hedge Hedging Foreign Currency Payables Forward Contracts Money Market Instruments Currency Options Contracts Cross-Hedging Minor Currency Exposure Hedging Contingent Exposure Hedging Recurrent Exposure with Swap Contracts Hedging through Invoice Currency Hedging via Lead and Lag Exposure Netting International Finance in Practice:
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financial instrument whose pay-offs is derived from some other asset which is called an underlying asset. Option‚ an example of a derivative security‚ is a more complicated derivative. There are a large number of simple derivatives like futures or forward contracts or swaps. Derivatives are tools to reduce a firm’s risk exposure. A firm can do away with unnecessary parts of risk exposure and even convert exposures into quite different forms by using derivatives. Hedging is the term used for reducing
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The situations include • Purchasing or selling on credit goods or services when prices are stated in foreign currencies • Borrowing or lending funds when repayment is to be made in a foreign currency • Being a party to an unperformed forward contract • Acquiring assets or incurring liabilities denominated in foreign currencies [pic] Example (purchasing or selling): Leo Srivastava is the director of finance for Pixel Manufacturing‚ a U.S.-based manufacturer of hand-held computer systems
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centuries‚ with early examples including tulip bulb options in Holland and rice futures in Japan during the 17th century. But futures markets were relatively small until the 1970s when developments in pricing methodology spurred spectacular growth. The derivatives market has grown 100-fold over the past 30 years‚ with estimates of the current size of the market at more than $200 trillion‚ based on the notional value of contracts outstanding. (Andrew Balls 2014) Taking out short term derivatives or taking
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not an “accounting” cost). Note that net income does not reflect the amount of equity capital employed‚ but EVA does. Relationship between EVA and MVA 1) they tend to go in the same direction (pos. correlation). However‚ MVA depends on stock prices/future expectations of investors. 2) EVA is used for managerial assessment more than MVA. EVA reflects performance over a year‚ while MVA reflects performance over the companies whole life. EVA can be applied to individual decisions or other units of a large
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technique to apply. A futures hedge involves the use of currency futures. To hedge future payables‚ the firm may purchase a currency futures contract for the currency that it will be required. A forward hedge differs from a futures hedge in that forward contracts are used instead of futures contract to lock in the future exchange rate at which the firm will buy or sell a currency .An exposure to exchange rate movements need not necessarily be hedged‚ despite the ease of futures and forward hedging. Based
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RATE RISK EXPOSURE There are number of ways by which exchange rate risk exposure can be managed: - Natural Hedges - Cash Management - Adjusting of Intracompany accounts - International financing hedges and currency hedges through forward contracts‚ futures contracts‚ currency options and currency swaps NATURAL HEDGE - A hedge (risk reduction action) that occurs naturally as a result of a firm’s normal operations. For example‚ revenue received in a foreign currency and used to pay commitments
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FIN 350 Prof. Porter Problem Set 4 1. Describe what happens to the total risk of a portfolio as the number of securities is increased. Differentiate between systematic risk and unsystematic risk and explain how total risk and systematic risk are measured. As the number of securities increases‚ the total risk of the portfolio decreases. This decrease occurs due to the benefits of diversification which is the process of acquiring a portfolio of securities that have dissimilar risk-return characteristics
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