Fundamentals of Financial Management

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Chapter 5
Currency Derivatives Lecture Outline
Forward Market
How MNCs Can Use Forward Contracts Non-Deliverable Forward Contracts

Currency Futures Market
Contract Specifications Trading Futures Comparison of Currency Futures and Forward Contracts Pricing Currency Futures 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 Call Option Premiums How Firms Use Currency Call Options Speculating with Currency Call Options

Currency Put Options
Factors Affecting Currency Put Option Premiums Hedging with Currency Put Options Speculating with Currency Put Options
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Later in the text it is shown that share prices react predominantly in relation to the home country share index, so the idea that one can buy exposure to foreign currencies in this way is a bit of a myth.

Answers to End of Chapter Questions
1. Forward versus Futures Contracts. Compare and contrast forward and futures contracts. ANSWER: Because currency futures contracts are standardized into small amounts, they can be valuable for the speculator or small firm (a commercial bank’s forward contracts are more common for larger amounts). However, the standardized format of futures forces limited maturities and amounts. 2. Using Currency Futures. a. How can currency futures be used by corporations? ANSWER: U.S. corporations that desire to lock in a price at which they can sell a foreign currency would sell currency futures. U.S. corporations that desire to lock in a price at which they can purchase a foreign currency would purchase currency futures. b. How can currency futures be used by speculators? ANSWER: Speculators who expect a currency to appreciate could purchase currency futures contracts for that currency. Speculators who expect a currency to depreciate could sell currency futures contracts for that currency. 3. Currency Options. Differentiate between a currency call option and a currency put option.

ANSWER: A currency call option provides the
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