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Butler, Multinational Finance, 4e, 2008, John Wiley & Sons Ltd
Chapter 5
Currency Futures and Futures Markets
Part II
Derivative Securities for
Financial Risk Management
Learning objectives
3 Currency futures
5-3
2006 contract
volume (mil)
1 CME - Chicago Mercantile Exchange (U.S.)
1,101.7
2 Eurex - Eurex (Germany & Switzerland)
960.6
3 CBOT - Chicago Board of Trade (U.S.)
678.3
4 Euronext - (Amsterdam/Brussels/Lisbon/Paris/London) 420.0
5 Mexican Derivatives Exchange - (Mexico City)
274.7
6 BM&F - Bolsa Mercadorias & de Futuros (Brazil)
258.5
7 NYMEX - New York Mercantile Exchange (U.S.)
216.3
8 Dalian Commodity Exchange - (China)
170.6
9 National Stock Exchange of India - (India)
117.7
10 ICE Futures - (U.K.)
92.6
5-2
5-4
v/$
Long $s
Net position
Source: Futures Industry Association (www.futuresindustry.org)
Butler / Multinational Finance
5-5
Butler / Multinational Finance
+50 million
-$40 million
s/$
+50 million
-Goods
5-6
Kirt C. Butler, Multinational Finance, 4e, 2008, John Wiley & Sons Ltd
Currency futures contracts and exchanges
Hedging with currency futures
Forwards Futures
Counterparty Bank
CME Clearinghouse
Maturity
Negotiated
Amount
Negotiated
Fees
Bid-ask
Commissions
Collateral
Negotiated
Margin account
Settlement
At maturity
5-7
Butler / Multinational Finance
5-8
Butler / Multinational Finance
Some definitions
5-9
5-10
Butler / Multinational Finance
FutTd/f = STd/f
Forward
premium
Fut0d/f
S0d/f
T
5-11
5-12
Butler / Multinational Finance
Kirt C. Butler, Multinational Finance, 4e, 2008, John Wiley & Sons Ltd
Currency futures contracts and exchanges
Hedging with currency futures
Jan 18
The futures
expiration date
is after the
underlying
exposure
A delta hedge
std/f = + futtd/f + et
std/f = percentage change in the spot rate
futtd/f = percentage change in the futures price
Jun 3 Jun 16
-100
million
Underlying
obligation
5-14
Butler / Multinational Finance
std/f1 = + std/f2 + et
5-16
Butler / Multinational Finance
5-18
Butler / Multinational Finance
Kirt C. Butler, Multinational Finance, 4e, 2008, John Wiley & Sons Ltd
Currency futures contracts and exchanges
Hedging with currency futures
A delta-cross hedge
std/f1 = + futtd/f2 + et
std/f1
5-20
Butler / Multinational Finance
5-21
Hedge
Hedge ratio estimation
Exact match
Mismatch
Exact
Perfect hedge
Cross hedge
match
std/f = +std/f+et
std/f1 = +std/f2+et
Maturity
Mismatch
Delta hedge
Delta-cross hedge
std/f = +futtd/f+et
std/f1 = +futtd/f2+et
5-23
5-22
Butler / Multinational Finance