FX derivitaves Flashcards
What is a short position in a FX forward ?
A short position in the forward contract means the party will sell the foreign currency at a certain date
What is the payoff for the long position
In this example draw a graph to show the long position of the corporation
Can you draw a graph showing the short position of the bank ??
What is the relationship between spot and forward rates ??
What formula lets you work out how much you pay more/less in future compared to the spot rate
It is the percentage by which the forward rate exceeds (or lower than) the spot rate at a given point in time.
What is a non-deliverable contract ??
This does not result in an actual exchange of currencies, instead one party makes a net payment to the other based on a market exchange rate on the day of settlement
Essentially a contract that closes out at the maturity date
Why do companies use NDF
To generate a net-zero or close to outcome
What are currency future contracts ??
Contracts specifying a standard volume of a particular currency to be exchanged on a specific settlement date
What do futures and forwards have in common ??
Similar obligation - a specified amount of a specified currency at a specified exchange rate on a specific future date
What differences does forwards and futures have ??
Future contracts can be traded by firms or individuals through brokers on the trading floor of an exchange (e.g. Chicago Mercantile Exchange), automated trading systems (e.g. GLOBEX), or the over-the-counter market.
Forward contracts are tailor made between two parties
How can futures be used to hedge foreign currency exposures ??
How can futures be used to speculate FX movements ?
What does a futures contract specify ?
Who has made a gain and who has made a loss ?
What does the clearing house do in the futures market ?
How does the clearing house minimise credit risk ??
They impose margin requirements to cover fluctuations in the value of a contract, meaning the participants must make deposits with their respective brokerage firms when they take a position
What are the 2 types of margin deposits ??
-Initial Margin
-Variation Margin
What is the buyers and sellers margin at the end of the day ??
What are currency options ??
They provide the right to purchase or sell currencies at specified prices, they are classified as calls or puts
Whats the differences between American and European options ??
European: only exercise on maturity date
Americans: can be exercised anytime
What is a currency call option ???
A currency call option grants the holder (by paying a premium) the right to buy a specific currency at a specific price (called the exercise or strike price) within a specific period of time.
When is the call option said to be in the money, at the money and out of the money ??
Draw a graph to show the position of the call option
What determines the premium ??
A call option premium is influenced by the probability of a payout, Greater the likelihood of payout, the higher the premium
When is the call option premium higher ??
-Difference between spot FX rate and strike rate (𝑆−𝑋) is larger
-Time to expiration date (𝑇) is longer
-Volatility of the currency (𝜎) is greater
What profit would a speculator make if they purchase call options on a currency they expect to appreciate ??
What profit would a speculator make if they were to sell call options on a currency that they expect to depreciate ??
What is the profit of the buyer of this call option ???
Could you show this on a graph from the buyers perspective ?
What profit would a seller make ??
Could you show this on a graph from the sellers perspective
What is a currency put option ??
A currency put option grants the holder (by paying a premium) the right to sell a specific currency at a specific price (called the exercise or strike price) within a specific period of time.
With a put option with a strike price of £0.60/$ when is the put option in, at or out of the money
What is the put option premium ??
The put option premium is higher when:
-Difference between strike rate and spot rate (𝑋−𝑆) is larger
-Time to expiration date (𝑇) is longer
-Volatility of the currency (𝜎) is greater
What profit would a speculator make if they were to purchase put options on a currency that they expect to appreciate ??
What profit would a speculator make if they were to purchase put options on a currency that they expect to depreciate ??
