the ace forward option future fixed
TRANSCRIPT
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Future, Forward, and Option Hedg
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Agenda
Question 1: Future Hedging
Question 2: Option Hedging
Question 3: Forward Hedging
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Agenda
Question 1: Future Hedging
Question 2: Option Hedging
Question 3: Forward Hedging
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Question 1 Future Hedging
Input Process Outpu
Control
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Future HedgingCurrent Condition Implementation
GrossNet
BenefitConsequences
Input OutProcess
Control
Question 1 Future Hedging
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Future Hedging - InputJamie Rodriguez, a currency trader for Chicago-based Ventosa Investments, usefollowing futures quotes on the British pound () to speculate on the value of th
a. If Jamie buys 5 June pound futures, and the spot rate at maturity is $1.3the value of her position?b. If Jamie sells 12 March pound futures, and the spot rate at maturity is $is the value of her position?c. If Jamie buys 3 March pound futures, and the spot rate at maturity is $is the value of her position?d. If Jamie sells 12 June pound futures, and the spot rate at maturity is $
is the value of her position?
Maturity
MarchJune
Settle O
1.42281.4162
British Pound Futures, US$/pound(CME)
Contract pounds
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Future Hedging - Input
standardized contract between two parties to buy or sell a specifiedasset of standardized quantity and quality for a price agreed upon
today with delivery and payment occurring at a specified future delivedate
Standardized contract size and delivery dateDaily settlements in market places
Mostly settled by offset
Future Contracts
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Future Hedging - Processa. If Jamie buys 5 June pound futures, and the spot rate at maturity is $1.3the value of her position?
Date Spot Market Future Market
Now Not Available $ 1.4162 /
June $ 1.3980 / $ 1.4162 /
$ 1.3980$ 1.4162 _($ 0.0182) /
(0.0182) x 62,500 = ($ 1,137.5)
Loss for 5 Cont$ 5,687.
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d
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Date Spot Market Future Market
Now Not Available $ 1.4228 /
March $ 1.4560 / $ 1.4228 /
$ 1.4560$ 1.4228 _$ 0.0332 /
0.0332 x 62,500 = $ 2,075
Profit for 3 Cont$ 6,225
c. If Jamie buys 3 March pound futures, and the spot rate at maturity is $is the value of her position?
Future Hedging - Process
d i
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d. If Jamie sells 12 June pound futures, and the spot rate at maturity is $is the value of her position?
Date Spot Market Future Market
Now Not Available $ 1.4162 /
March $ 1.3980 / $ 1.4162 /
$ 1.4162$ 1.3980 _$ 0.0182 /
0.0182 x 62,500 = $ 1,137.5
Profit for 12 Cont$ 13,650
Future Hedging - Process
F H d i O
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Date Contracts Spot Market
June Buys 5 $ 1.4162 /
March
$ 1.3980 /
$ 1.4162 /
Future Hedging - Output
FutureMarket
P
March
June
Buys 3
Sells 12
Sells 12
$ 1.4560 /
$ 1.4560 /
$ 1.3980 /
$ 1.4228 /
$ 1.4228 /
Loss
Los
Pro
Pro
Value of Jamies Position
F H d i C l
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Future Hedging - Control
Benefits Consequences
Standardize (contract size, d
date, etc.)
Legal obligation to futhe contract
The obligation can be removed
before the expiry of the contract bymaking an opposite transaction
Pay the initial
Tradable (actively traded in themarket)
A d
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Agenda
Question 1: Future Hedging
Question 2: Option Hedging
Question 3: Forward Hedging
Q i 2 O i M k
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Question 2 Option Market
Input Process Outpu
Control
Q i 2 O i M k
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Question 2 Option Market
Option HedgingCurrent Condition Implementation
GrossNet
BenefitConsequences
Input OutProcess
Control
O ti M k t I t
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Option Market - Input
CallOption Gives the buyer the right to buy aspecified currency at a specified
exchange rate, at or before a specifieddate
Gives the buyer the right to sell aspecified currency at a specified
exchange rate, at or before a specified
date
O ti M k t I t
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Option Market - Input
In the money if exchange rate < strikeprice
At the money if exchange rate = strikepriceOut of the money if exchange rate > strikepriceIn the money if exchange rate > strike
price At the money if exchange rate = strikepriceOut of the money if exchange rate < strikeprice
CallOption
O ti M k t I t
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Option Market - Input
Option
Put on SGD
Call on SGD
Strike Price P
$0.65/S$
$0.65/S$ $0
$
Sallie Schnudel trades currencies for Keystone Funds in Jakarta. She fonearly all of her time and attention on the USD / SGD cross rate. Thrate is $0.6000/S$ . After considerable study, she has concluded that the Si
dollar will appreciate versus the US dollar in the
a. Should Sallie buy a put on Singapore dollars or a call on Singapore dollab. What is Sallies breakeven price on the option purchased in part (a)?c. Using your answer from part (a), what is Sallies gross profit a
(including premium) if the spot rate at the end of 90 days is indeed $0.70d. Using your answer from part (a), what is Sallies gross profit a
(including premium) if the spot rate at the end of 90 days is indeed $0.80
O ti M k t I t
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Option Market - Inputa. Should Sallie buy a put on Singapore dollars or a call on Singapore
0
-0.00003
0.65
Spot Rate Strike PricPremium
Out of themoney
In themoney
Option Market Process
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Option Market - Processa. Should Sallie buy a put on Singapore dollars or a call on Singapore
0
-0.00046
0.65
Spot Rate Strike PricPremium
Sallie should buyif Singapore doll
appreciate in t
Out of themoney
In themoney
Option Market Process
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Option Market - Processb. What is Sallies breakeven price on the option purchased in part (a)?
0
-0.00046
0.650460.65
Spot Rate Strike PricPremium
Out of themoney
In themoney BEP=
Option Market Output
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Option Market - Outputc. Using your answer from part (a), what is Sallies gross profit and net pr
(including premium) if the spot rate at the end of 90 days is ind$0.7000/S$?
0
-0.00046
0.650460.65
Spot Rate Strike PricPremium Gross P
0.7000 0.65=
Net Pr
0.7000 0.60.049
Out of themoney
In themoney
Option Market Output
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Option Market - Outputd. Using your answer from part (a), what is Sallies gross profit and net pr
(including premium) if the spot rate at the end of 90 days is ind$0.8000/S$?
0
-0.00046
0.650460.65
Spot Rate Strike PricPremium Gross P
0.8000 0.65=
Net Pr
0.8000 0.60.149
Out of themoney
In themoney
Option Market Control
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Option Market - Control
Benefit Consequences
Limited downside risk
Flexibility & variety of strategy
More expensiv
Risk of unhedge
Potentially provide significantcash flow relief
Has the right butnot the obligation
http://www.lariba.com/knowledge-center/articles/pdf/Malaysia%20-%20GOLD%20-%20Hedging%20
Agenda
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Agenda
Question 1: Future HedgingQuestion 2: Option Hedging
Question 3: Forward Hedging
Question 3: Theory FX Forwards
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Question 3: Theory FX Forwards
Forward FX Outright Agreement
An agreement between two parties to exchange two currencies fosettlement on a fixed future date.
Premium = Forward Rate > Spot Rate
Discount = Forward Rate < Spot Rate
Question 3: Forward Hedging
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Question 3: Forward Hedging
Christoph Hoffeman trades currency for Blade Capital of Geneva
Christoph has $10 million to begin with, and he must state all profit
the end of any speculation in US dollars.
The spot rate on the euro is $1.3358/
Case 3 Question
Question A: Euro Appreciate
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Question A: Euro Appreciate
IfChristoph Hoffeman believes the euro will continue r i se in va lue against the US dollar, so that he expects t
spot rate to be $1.3600/ at the end of 30 days,
what should he do?
Question B: Euro Depreciate
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Question B: Euro Depreciate
IfChristoph Hoffeman believes the euro will continuedecr ease in value against the US dollar, so that h
expects the spot rate to be $1.2800/ at the end days, what should he do?
Question 3 Forward Hedging
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Question 3 Forward Hedging
Input Process Outpu
Control
Question 3 Forward Hedging
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Forward HedgingCurrent Condition Implementation
GrossNet
BenefitConsequences
Input OutProcess
Control
Question 3 Forward Hedging
Question A: Euro Appreciate
Question B: Euro Depreciate
Question 3: Forward Hedging
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Question 3: Forward Hedging
Forward rate = 1.3358 + . 2
+ . = $1.3360/
How to calculate FX forward rate
http://www.global-rates.com/interest-rates/central-banks/central-bank-america/fed-in
Given condition:Spot rate: $1.3358/ US-interest rate: 0.25% annumEuro-interest rate: 0.05% annum
Forward Hedging - Input
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Forward Hedging - Input
Spot Rate = $1.3358/ 0.7486
Forward rate = $1.3360/ 0.7485Expected SR = $1.3600/ 0.735(A)
$1.2800/ 0.7812(B)
Forward Hedging Current Condition
Forward Hedging - Input
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Forward Hedging Input
Hedging No Hedging
Now Sell $ forward @ 0.7485/$
30-dayslater Deliver $ and receive $10 million * 0.7485/$ = 7,485,000
Deliver $ and recei$10 million * 0.73 7,353,000
The $ end up worth 7,485,000 - 7,353,000 = 132,higher
Question A: Euro Appreciate @ $1.
Decision: Mr. Christoph Hoffeman should Hedge
Forward Hedging - Input
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Forward Hedging Input
Hedging No Hedging
Now Sell $ forward @ 0.7485/$
30-dayslater Deliver $ and receive $10 million * 0.7485/$ = 7,485,000
Deliver $ and recei$10 million * 0.73 7,812,500
Question B: Euro Depreciate @ $1.
The $ end up worth 7,812,500 - 7,485,000 = 327,higher
Decision: Mr. Christoph Hoffeman should not Hedge
Forward Hedging - Input
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Forward Hedging Input
372,500 * $1.2800 = $419,200
132,000 * $1.3360 = $176,352
Profit in terms of $
Question A
Question B
Forward Hedging - Control
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Forward Hedging Control
Benefits Consequences
No premium or payment upfront
Mitigate risk of currency volatility
Securing value of your asset
Loss opportunity to make
BenefitConsequenc
es
Gross ProfitNet Profit
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Future, Forward, and Option Hedg