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interest
To convert these per-unit prices into futures contract prices it is
necessary to multiply the prices in the table by the contract amounts.
For example: the price of one Japanese yen March contract is
$0.009593/ * 12,500,000 = $ 119,912.50
If we assume risk neutrality, the per-unit price of futures equals
the markets expected future spot rate of the foreign currency. It is
changes in the markets expected future spot exchange rate that
drive futures contract prices up and down.
3. Margin
(1) Both buyers and sellers of currency futures must post a margin and
pay a transaction fee.
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a firms needs.
3. The flexibility in values of forward contracts and in margin maintenance,
as well as the absence of marking-to-market risk, make forwards
preferable to futures for importers, exporters, borrowers, and lenders who
wish to precisely hedge foreign exchange risk and exposure. Currency
futures are more likely to be preferred by speculators because gains on
futures contracts can be taken as cash and because the transaction costs
are small.
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31,250
German mark
62,500
250,000
Japanese Yen
6,250,000
Swiss franc
62,500
62,500
(2) American options: American options offer buyers more flexibility in that
they can be exercised on any date up to and including the maturity date of the
option.
3. The Expiring Months and Dates
(1) The expiring months: March, June, September, and December, plus one or
two near-term months.
(2) The expiring dates:
Mid-month options: Most options expire on the Friday before the third
Wednesday of the expiry month.
End-of-month (EOM) options: These expire on the last Friday of the month.
4. The Strike Prices
(1) The strike price (exercise price) gives the exchange rate at which the option
buyer has the right to buy or sell the foreign exchange.
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(2) Call option: A call option gives the buyer the right to buy the foreign
currency at the strike price or exchange rate on the option.
(3) Put option: A put option gives the buyer the right to sell the foreign currency
at the strike price.
5. An Example
German Mark
58.60
Puts
58 Mar
Vol.
Last
600
0.26
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Option Premium
1. Intrinsic Value
()
()
()
4. Flexibility of Options*
()
()
()
()
Interest Differential
()
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* For a given strike price, exchange-rate volatility, and period to expiration, American
options are typically more valuable than European options.
** The higher the interest rate on the currency paid for an option, the lower the present
value of the exercise price. A lower exercise price increases the market value of a call
and reduces the market value of a put.
*** The more the currency is expected to increase in value, that is, the currency tends
to trade at a forward premium, the higher the market value of a call option and the
lower the market value of a put option on that currency. Relatively high interest rate
suggests an expected decline in the value of the currency and , consequently, an
increased chance that a put will be exercised.
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