跨国金融-12e solution manualdocs_12E_IM_C08

Chapter 8

Foreign Currency Derivatives

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Questions

8-1.

Options versus Futures.

Explain the difference between foreign currency

options

and

futures

and

when either might be most appropriately used.

An option is a contract giving the buyer the right but not the obligation to buy or sell a given

amount of foreign exchange at a fixed price for a specified time period. A

future

is an exchange-

traded contract calling for future delivery of a standard amount of foreign currency at a fixed time,

place, and price.

The essence of the difference is that an option leaves the buyer with the choice of exercising or not

exercising. The

future

requires a mandatory delivery. The

future

is a standardized exchange-traded

contract often used as an alternative to a forward foreign exchange agreement.

Trading Location for Futures.

Check

The Wall Street Journal

to find where in the United States

foreign exchange future contracts are traded.

The Wall Street Journal

reports on foreign exchange futures trading for the International Monetary

Market in Chicago and for the Philadelphia Stock Exchange. These are the two major U.S. markets

for foreign exchange futures.

Futures Terminology.

Explain the meaning and probable significance for international business

of the following contract specifications:

Specific-sized contract.

Trading may be conducted only in preestablished multiples of currency

units. This means that a firm wishing to hedge some aspect of its foreign exchange risk is not able

to match the contract size with the size of the risk.

Standard method of stating exchange rates

. Rates are stated in “American terms,” meaning the

U.S. dollar value of the foreign currency, rather than in the more generally accepted “European

terms,” meaning the foreign currency price o

f a U.S. dollar. This has no conceptual significance,

although financial managers used to viewing exposure in European terms will find it necessary to

convert to reciprocals.

Standard maturity date

. All contracts mature at a preestablished date, being on the third Wednesday

of eight specified months. This means that a firm that wishes to use foreign exchange futures to

cover exchange risk will not be able to match the contract maturity with the risk maturity.

8-2.

8-3.

34

Eiteman/Stonehill/Moffett

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Multinational Business Finance,

Twelfth Edition

Collateral and maintenance margins

. An initia

l “margin,” meaning a cash deposit made at the

time a futures contract is purchased, is required. This is an inconvenience to most firms doing

international business because it means some of their cash is tied up in a unproductive manner.

Forward contracts made through banks for existing business clients do not normally require an

initial margin. A

maintenance margin

is also required, meaning that if the value of the contract

is marked to market every day and if the existing margin on deposit falls below a mandatory

percentage of the contract, additional margin must be deposited. This constitutes a big nuisance to

a business firm because it must be prepared for a daily outflow of cash than cannot be anticipated.

(Of course, on some days the cash flow would be into the firm.)

Counterparty

. All futures contracts are with the clearing house of the exchange where they are

traded. Consequently a firm or individual engaged in buying or selling futures contracts need not

worry about the credit risk of the opposite party.

A Futures Trade.

A newspaper shows the following prices for the previous day’s trading in U.S.

dollar-euro currency futures:

Month

Open:

Settlement:

Change:

High:

Low:

Estimated volume:

Open interest:

Contract size:

December

0.9124

0.9136

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0.0027

0.9147

0.9098

29,763

111,360

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125,000

8-4.

What do the above terms indicate?

This data reports that 29,763 contracts, each contract being for

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125,000, were traded for

settlement on the third Wednesday of the following December. The total euro value of all

contracts traded on the day for which data is reported is the product of the two numbers: 29,763

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125,000

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3,720,375,000. The highest price during the day at which euro futures traded was

$$0.9147/

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. The lowest price was $$0.9098/

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. The first trade of the day was at $$0.9124/

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and the last

trade, called “settlement,” was at $$0.9136/

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. This closing price was 0.0027 above the previous

day’s close, from which one can determine that on the previous day euro contracts closed at

$$0.9136/

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$$0.0027/

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$$0.9109/

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. The closing “settlement” price is the price used by futures

exchanges to determine margin calls. Open interest is the sum of all long (buying futures) and

short (selling futures) contracts outstanding.

Puts and Calls.

What is the basic difference between a

put

on British pounds sterling and a

call

on sterling?

A

put

on pounds sterling is a contract giving the owner (buyer) the right but not the obligation to

sell pounds sterling for dollars at the exchange rate stated in the put. A

call

on pounds sterling is a

contract giving the owner (buyer) the right but not the obligation to buy pounds sterling for dollars

at the exchange rate stated in the call.

8-5.