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CURRENCY AND INTEREST RATEFUTURES
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CURRENCY FUTURES• A futures contract, like a forward contract is an agreement
between two parties to exchange one asset for another, at aspecified date in the future, at a rate of exchange specified up
front. However, there are a number of significant differences.
• Major Features of Futures Contracts
• Organized Exchanges not OTC markets.
• Standardization : Amount of asset, expiry dates,
deliverable grades etc.
• Clearing House: A party to all contracts. Guarantees
performance. Mitigates/Eliminates Credit Risk • Daily mark-to-market and a system of margins. Daily cash
inflows/outflows.
• Actual delivery is rare. Most positions squared up before expiry.
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Foreign Currency Futures
• Contract specificationsare established by theexchange on which futures are traded.
• Major features that are standardized are:
– Contract size
– Method of stating exchange rates
– Maturity date
– Last trading day
– Collateral and maintenance margins
– Settlement procedure
– Commissions
– Use of a clearinghouse as a counterparty
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FUTURES CONTRACTS
• Global Futures Exchanges:
• 1) IMM: International Monetary Market
• 2) LIFFE: London InternationalFinancial Futures Exchange
• 3) CBOT: Chicago Board of Trade
•
4) SIMEX: Singapore International• Monetary Exchange
• 5) DTB: Deutsche Termin Bourse
• 6) HKFE: Hong Kong Futures Exchange
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FUTURES CONTRACTS
• B. Forward vs. Futures Contracts
• Basic differences:• 1) Trading Locations
• 2) Regulation
• 3) Frequency of delivery
• 4) Size of contract
• 5) Transaction Costs• 6) Quotes • 7) Margins
• 8) Credit Risk
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FUTURES CONTRACTS
• Advantages of Futures:
• 1) Easy liquidation
• 2) Well- organized and
stable market.
• 3) No credit risk
• Disadvantages of
Futures:
• 1) Limited to a few
currencies
• 2) Limited dates of
delivery
• 3) Rigid contract sizes
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FUTURES CONTRACTS ON IMM
• Available Futures Currencies/Contract Size:
• 1) British pound / 62500
•
2) Canadian dollar /100000• 3) Euro / 125000
• 4) Swiss franc / 125000
•
5) Japanese yen / 12.5 million• 6) Mexican peso / 500000
• 7) Australian dollar / 100000
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FUTURES CONTRACTS
• Following are the transaction costs:
(1) Commission payment to a floor trader
(2) Brokerage (3) Bid-Offer Spreads• Leverage is high
• Initial margin required is relatively low
(less than 2% of contract value). Thisvaries between exchanges.
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FUTURES CONTRACTS:
SAFEGUARDS
• Maximum price movements
• 1) Contracts set to a daily price limit
restricting maximum daily price
movements.
• 2) If limit is reached, a margin call may
be necessary to maintain a minimum
margin.Not all exchanges impose such limits.
Some exchanges impose these limits in
times of excessive volatility.
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System of Margins
•
Initial margin : When position is opened• Variation Margin: Settlement of daily gains and losses
• Maintenance Margin : Minimum balance in margin account.
Balance falls below this, margin call issued. If not met, position
liquidated.
• Regulators specify minimum margins between clearing
members and clearinghouse. Margins at other levels
negotiated
• Margins can be deposited in cash or specified securities such
as T-bills. Interest on securities continues to accrue to owner.
Margin is a performance bond.
• Levels of margins may be changed if volatility increases.
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System of Margins
• With clearing house guarantee, buyer-seller need not worry
about each other’s creditworthiness.
• Standardized contracts with margin system increase
liquidity.
Protects clearing house; enhances financial integrity
of the exchange. Credit risk issues almost eliminated
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CLEARING
HOUSE
CLEARING
MEMBER A
CLEARING
MEMBER B
NON-CLEARING
MEMBER
CUSTOMER
CUSTOMER
NON-CLEARING
MEMBER CUSTOMER
CUSTOMER
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TYPES OF ORDERS IN FUTURES MARKETSMarket Orders : Execute at best available price
Limit Orders: Sell above or buy below stated limitsMarket If Touched or MIT Orders: Become market orders
If price touches a trigger
Stop-Loss Orders : Sell if price falls below a limit; buy if it rises
above a limit. Used to limit losses on existing positions
Stop Limit Orders : Stop loss plus limit
Time of Day Orders, Day Orders, Good Till Canceled(GTC)
Orders
Brokers, Floor Traders, Dual Traders, Futures Commission
Merchants. Hedgers and speculators both participate.
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Currency Futures Contract Specifications Exchange: IMM at Chicago Mercantile Exchange(CME)
British Pound Japan Yen Size: £62500 ¥12,500,000
"Tick": $0.0002 per £ $0.000001 per ¥
(Per Contract) ($12.50) ($12.50)
Expiry Months: January, March, April, June, July, September,
October, December, & Spot Month (Both GBP and JPY)
Limit: NO LIMIT FOR THE FIRST 15 MINUTES OF TRADING.
A schedule of expanding price limits will be in effect when the 15-minute period is ended. (Both GBP and JPY)
“Tick” : Minimum size of price movement.
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Click for
Chart
Current Session Prior Day
Open High Low Last Time Chg Vol Set Op Int
Jun'12 1.5552 1.5558 1.5487 1.554704:16Jun
15 0.0015 11251 1.5532 75258
Sep'12 1.5549 1.5552 1.5480 1.5541
04:16
Jun
15 0.0016 33719 1.5525 108896
Dec'12 - - - 1.5521*
04:16
Jun
15 - - 1.5522 100
Mar'13 1.5500 1.5500 1.5500 1.5483
04:16
Jun
15 -0.0034 7 1.5517 5
Jun'13 - - - 1.5517
*
16:25
Jun14
- - 1.5517 1
Sep'13 - - - 1.5517
*
16:25
Jun
14 - - 1.5517 -
CME - GBP FUTURES QUOTES 15 JUNE 2012
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Current Session Prior Day
Open High Low Last Time Chg Vol Set Op Int
Jun'12 1.26300 1.26480 1.26140 1.2628004:25
Jun 15 0.00270 17313 1.2601 150389
Sep'12 1.26420 1.26570 1.26230 1.2638004:25
Jun 15 0.00270 56426 1.2611 310959
Dec'12 1.26610 1.26610 1.26520 1.2652004:25
Jun 15 0.00250 9 1.2627 1035
Mar'1
3 - - -
1.26460
* 04:24
Jun 15 - - 1.2646 36
Jun'13 - - - 1.26650
* 16:24
Jun 14 - - 1.2665 510
Sep'13 - - - 1.26850
* 16:24
Jun 14 - - 1.2685 -
CME - EURO FUTURES QUOTES 15 JUNE 2012
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Click for
Chart
Current Session Prior Day
Open High Low Last Time Set Chg Vol Set Op Int
Jun'12 1.05120 1.05310 1.05050 1.0516004:33
Jun 15 - 0.00250 2741 1.04910 43533
Sep'12 1.05410 1.05540 1.05270 1.0540004:33
Jun 15 - 0.00250 9802 1.05150 54758
Dec'12 - - - 1.05480
* 04:32
Jun 15 - - - 1.05480 6
Mar'13 - - - 1.05780
* 04:33
Jun 15 - - - 1.05780 3
Jun'13 - - - 1.06190
* 16:27
Jun 14 - - - 1.06190 -
Sep'13 - - - 1.06500
* 16:27
Jun 14 - - - 1.06500 -
CME - CHF FUTURES QUOTES 15 JUNE 2012
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CURRENCY FUTURES IN INDIA
• Currency futures markets were launched in India in August
2008. The regulatory authorities viz. RBI and SEBI issued
guidelines for exchange traded currency futures in August 2008
and permitted the three major stock exchanges viz. NSE, BSE
and MCX to launch the US dollar- Indian rupee contract.
• Subsequently, in January 2010 futures contracts between
Rupee and Euro, Rupee and Pound Sterling and Rupee and Yen
were introduced on these exchanges.
• Only Indian residents are allowed to trade in these contracts.
Also, there is no requirement of underlying currency exposure so
that individuals and companies can use them for currency
speculation.
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Contracts with monthly maturities out to twelve months are
available. The contracts are cash settled in INR. Contracts
expire on the last working day of the month. Quotations are
given in rupee terms.
While contracts out to twelve calendar months are available,
only in the case of USD-INR there is some trading volume out
to about six months but in other currencies there is virtuallyno trading beyond 2-3 months.
Contracts are traded on MCX-SX and NSE. Recently, the
trading volume on MCX-SX has been larger than NSE.USE, a new exchange launched by BSE in partnership with
MMTC, ICICI Bank and State Bank of India has also started
trading the four currency futures contracts.
Margins are calculated using a VAR framework.
USD/INR FUTURES CONTRACT SPECIFICATIONS
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Underlying
Unit of trading
Trading Hours
Contract trading cycle
Contract Expiration Date
Tick Size
Last Trading Day
Final settlement day
The exchange rate in Indian Rupees for a US
Dollar
1 (1 unit denotes 1000 USD)
9.00 a.m. to 05.00 p.m. (Mon to Fri)
12 month trading cycle.
Last business day of the month
0.25 paise or INR 0.0025
Two working days prior to the last businessday of the expiry month at 12 noon
Last working day (excluding Saturdays) of the
expiry month. The last working day will be the
same as that for interbank settlements in
Mumbai.
USD/INR FUTURES CONTRACT SPECIFICATIONS
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USD/INR FUTURES CONTRACT SPECIFICATIONS
Mode of settlement : Cash settled in Indian Rupees Daily settlement price (DSP) : Calculated on the basis of the
last half an hour weighted average price.
Final settlement price (FSP) : RBI reference rate
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Symbol DINR
Contract Size INR 2,000,000
Delivery Months Monthly contracts for twelve months forward
Last Trading Day Two Business Days prior to the last working day of the contract month
Settlement Day The Business Day immediately following the last day of expiring contract
New Contract Listing Business day immediately following the last trading day
Price QuoteUS$ quoted in Cents per 100 Indian Rupees ( e.g. 209.56 /209.62 U
Cents per 100 Indian Rupees)Tick Size US$ 0.000001 per INR or $ 2 per tick
Trading Days Monday through to Friday
Trading Hours 08:30 - 23:30 Hours Dubai time (GMT+4)
Maximum Order Size500 lots for Banks and institutions promoted by Banks. All other entitie
200 LotsPrice Limit No Price Limits - Note 1*
Wholesale Trades EFS, EFP, Block trade facilities available
Cash Settlement Price Basis
Open Positions at expiry of contract shall be settled in US Dollars as pethe Dialy Settlement Price (DSP) declared by the ExchangeThe DSP would be based on the official US Dollar reference rate issued b
the Reserve Bank of India, based on bank rates in Mumbai at 12 noon othe day of trading or earliest available date
RUPE-DOLLAR FUTURES CONTRACT ON DGCX
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Contract Specifications for EURO-INR
Symbol : EURINR
Unit of trading : 1 (1 unit denotes 1000 EURO)
Underlying : EURO
Quotation/Price Quote : Rs. per EUR
Tick size : 0.25 paise or INR 0.0025
Trading hours : Monday to Friday 9:00 a.m. to 5:00 p.m.
Contract trading cycle : 12 month trading cycle.
Settlement price :RBI Reference Rate on the date of expiry
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Last trading day : Two working days prior to the last business
day of the expiry month at 12 noon.
Final settlement day : Last working day (excluding Saturdays)
of the expiry month. The last working day will be the same as
that for Inter-bank Settlements in Mumbai.
Mode of settlement : Cash settled in Indian Rupees
Daily settlement price (DSP) : DSP shall be calculated on the
basis of the last half an hour weighted average price of such
contract or such other price as may be decided by the relevantauthority from time to time.
Final Settlement Price : RBI reference rate
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Commercial banks have to obtain RBI’s approval to
trade in currency futures.
RBI has set the eligibility criteria for the banks as
follows :
(1) The qualified banks must be authorized by RBI
(2) Must have minimum net worth of Rs.500-crores
(3) Minimum CRAR of 10 per cent
(4) Net NPA should not exceed 3 per cent
(5) Must have earned net profit for last 3 years.
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CONTRACT OPEN HIGH LOW CLOSE VOLUME OIUSDINR
Jun-2012 55.73 55.94 55.6575 55.8475 1472414 858651
Jul-2012 56.0575 56.23 55.94 56.1225 41785 228552
Aug-2012 56.1775 56.455 56.1775 56.3525 6612 117363
Sep-2012 56.5 56.63 56.42 56.57 681 52379
Oct-2012 56.705 56.85 56.62 56.77 246 27405
Nov-2012 56.8225 57 56.8225 57 32 9315
Dec-2012 56.95 56.95 56.95 56.95 6 5165Jan-2013 57.24 57.24 57.24 57.24 3 2275
Feb-2013 57.825 57.825 57.825 57.825 2 5883
Mar-2013 58.1 58.1 57.87 57.87 1202 12302
Apr-2013 58 58.1725 58 58.17 102 31321
MCX-SX* Currency FuturesAs on : June 14, 2012
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Contract Open High Low Close Qty Vol OI
EURINR
Jun-2012 70.02 70.2 69.945 70.1475 22885 26303
Jul-2012 70.38 70.47 70.25 70.4325 376 3080 Dec-2012 70 70 70 70 60 1100
GBPINR
Jun-2012 86.6 86.73 86.2625 86.6825 10246 16712
Jul-2012 86.96 87.0225 86.59 86.9725 296 3318 Aug-2012 87.2 87.2 87.2 87.2 50 349
JPYINR
Jun-2012 70.195 70.46 70.0325 70.3975 12688 12550
Jul-2012 70.4525 70.7575 70.35 70.715 181 2448
MCX-SX* Currency FuturesAs on : June 14, 2012
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FUTURES PRICES, SPOT PRICES ANDEXPECTED SPOT PRICES
• Basis = (Spot Price – Futures Price)
• Normal Backwardation : Hedgers net short.Speculators must be net long; they would do so if they
expect futures price to rise.Futures price rises as maturity approaches.
• Contango : Hedgers net long. Speculators net short.Futures price expected to fall as maturity approaches
• Net Hedging Hypothesis
• Risk Aversion and behaviour of futures prices
•Futures Price = Expected Spot Price ?
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Backwardation Contango
FUTURES
PRICE
EXPECTED SPOT PRICE
FUTURES PRICE
Time
Expiry Expiry
Time
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FUTURES PRICES AND FORWARD
PRICES
• DETERMINISTIC INTEREST RATES:
FUTURES PRICES EQUAL FORWARD PRICES
• STOCHASTIC INTEREST RATES : FUTURES
PRICES DIFFER FROM SPOT PRICES DUE TO
DAILY GAINS AND LOSSES
• SPOT PRICE AND INTEREST RATE
POSITIVELY CORRELATED : FUTURS PRICE
EXCEEDS FORWARD PRICE
• NEGATIVE CORRELATION: FUTURES PRICE
LESS THAN FORWARD PRICE
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FUTURES PRICE AND SPOT PRICE
CASH-AND -CARRY ARBITRAGE
• Spot Price of a dollar : Rs.52.00
• 3-month Futures Price : Rs.53.80
• Rupee interest rate : 6% p.a.
• Dollar interest rate : 4% p.a.
• Borrow rupees, buy dollars and deposit, sell futures.
• 3 months later, deliver, get rupees, repay loan.
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Suppose the deal size is $50000 i.e. you have sold 50USD-INR contracts on MCX
Must deposit $(50000)/(1.01) = $49504.95
Must borrow Rs.(49504.95)(52.0) = Rs.2574257.40
Must repay (2574257.40)(1.015) = 2612871.26
On expiry, liquidate deposit, deliver on futures collect
Rs.2690000. Net profit: 77128.74Futures Price “too high” : Buy asset in spot market, store,
pay storage cost, sell futures, deliver at expiry.
Futures Price too low (e.g.52.65)
Reverse cash-and- carry arbitrage. Borrow dollars, convert to
rupees and deposit, buy futures. Take delivery at expiry and
repay dollar loan. Nothing but Covered Interest Arbitrage
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Arbitrage and Theoretical Futures Price
Let C denote the present value of carrying costs, St the spot
price, r the interest rate, and FUt,T the futures price for delivery
at T, Then theoretical futures price is given by FU
t,T= (S
t+ C)[1 + r(T-t)]
Actual futures price higher : cash-and-carry arbitrageActual futures price lower: reverse cash-and-carry arbitrage
For currency futures, futures prices are almost identical to
forward prices.
A similar relation will hold between FUt,T1 and Fut,T2, T2>T1>t
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In practice futures price does not exactly equal
theoretical futures price. Reasons:
1 Transaction costs – bid-offer spreads, brokerage
2 In some cases, restrictions on short sales (Does not
apply to currency futures)
3 Non-constant interest rates
4 Mark-to-market gains/losses.
5 “Convenience yield” (Commodity futures)
A band of variation around theoretical price.
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Hedging with Currency Futures A corporation has an asset e.g. a receivable in a currency A.
•
To hedge it should take a futures position such that futuresgenerate a positive cash flow whenever the asset declines in value.
•The firm is long in the underlying asset, it should go short in
futures i.e. it should sell futures contracts on A against its home
currency.
•When the firm is short in the undelying asset – a payable in
currency A – it should go long in futures.
Cash Position: Receive A; Futures Position: Deliver A
Cash Position: Deliver A; Futures Position: Receive A
If no futures between A and HC, use futures between A and a
currency closely correlated with HC.
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Futures Hedge : An Example
January 30. A UK firm has $250000 payable due on August 1.
£/$ spot:1.7550.
GBP Futures: September: 1.7125 December: 1.6875
Decides to hedge with September futures. GBP value of USDpayable at futures price:
(250000/1.7125) = £145985.40.
Each GBP futures contract is for £62500.
Sells (145985.40/62500) = 2.3357 rounded off to 2 contracts.
Could be rounded off to 3 contracts.
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On July 30 the rates are:
July 30: £/$ spot: 1.6850 September futures: 1.6750
Firm buys USD spot. It has to pay
GBP(250000/1.6850) = £148367.95
Compared to the GBP value of payable at the spot rate at startthis represents a loss of GBP 5917.81 .
Buys 2 September futures contracts at $1.6750 to close out the
futures position.
Gain on futures : $(1.7125-1.6750)(2)(62500) = £4687.50.
Not a perfect hedge. Basis narrowed.
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Futures Hedge : Example (contd)
• Choice of contract underlying was obvious.
• Firm chose a contract expiring immediately after the payable
was to be settled. Is this necessarily the right choice?
•
The number of contracts chosen was such that value of futures position equaled the value of cash market exposure,
aside from the unavoidable discrepancy due to standard size of
futures contracts. Is this the optimal choice?
Futures hedge involves three considerations: Underlying,expiry date of the contract, number of contracts. The latter
two problems do not arise with forwards. Why?
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Three Decisions (1) Which contract should be used i.e. the choice of
"underlying".
Home currency A; exposure in B; futures on B against A
available – Direct hedge.
Home currency A; exposure in C; no futures on C againstA. B and C are highly correlated; use futures on B – Cross
Hedge
(2) Choice of expiry date : In February A UK firm books a USDpayable maturing on June 3. To hedge, must sell GBP futures
(Buy USD futures). Which month? June or later?
(3) How many contracts? Choice of “hedge ratio”.
Value of futures position = Value of underlying exposure?
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Choice of expiry date: As expiry date approaches, basis narrows.
On expiry date futures price equals spot price. This is known as
“Convergence”.
Does convergence help you or hurt you?
If convergence helps, choose near contract
If convergence hurts, choose far contract.
However, liquidity less in far contracts; bid-offer spreads are
higher; basis volatility more.
Thumb rule followed by practitioners: Choose expiry date
immediately after underlying exposure is to be settled.
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Choice of Expiry Date
Basis at the start Positive Negative
Nature of hedge
Long F A
Short A F
Long Hedge: You must take delivery of underlying in yourfutures position. You have bought futures contracts.
Short Hedge : You must make delivery of underlying in yourfutures position. You have sold futures.
F: Convergence favours you. A: Convergence against you.
Positive Basis: Spot price > Futures Price
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Choosing the Number of Contracts
• A Swiss firm has a USD payable of $500,000, maturing November
15.
• It decides to sell December contracts priced at $0.74/CHF.
• At this price, the CHF equivalent of $500,000 is CHF 675675.68.
• Since one CHF contract is for CHF 125,000, it should sell :
(675675.68/125000) = 5.4054 rounded off to 5 or 6 contracts.
Sounds logical but is it necessarily correct?
What is the objective of hedging?
• To minimize the variance of the hedged position?
Define the "Hedge Ratio"(HR) as : VF/VH
= (Value of futures position/Value of cash position) Should HR = 1.0 alwa s?
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Direct Hedge with a Timing Mismatch
Choosing Hedge Ratio
• A Swiss firm on February 28 has a USD 500,000 payable to be
settled on July 1.
• Cash market position short USD. Must buy USD futures or
short CHF futures.
• It chooses to hedge by selling September CHF contracts. This
contract matures on September 18.
• The spot rate is USD/CHF 1.3335 or CHF/USD 0.7499
• September futures price is USD/CHF 1.4518 or CHF/USD
0.6888
• Each CHF contract is for CHF 125000.
• Determine the number of contracts it should short.
.
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Choosing Hedge Ratio ….
VC : The value of the cash market position measured in theforeign currency.
St: The spot rate at the start stated as units of home
currency(HC) per unit of foreign currency(FC).
T1 : The date when the cash position has to be settled.T2 : The date when the futures contract expires, T2 > T1 V
F: The value of the futures position measured in US dollars.
Ft,T2
: The price at time t of the futures contract maturing at T2
stated as units of HC per unit of FC. In the example HC: CHF FC: USD
Vc = $500000 St = 1.3335 T1: July 1
T2: September 18 F
t,T2= 1.4518
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Choosing Hedge Ratio….
F~ T1,T2
: The price of the same contract at time T1
(a random
variable) S~
T1 : The spot rate at time T1 when the hedge is lifted. Stated
as units of HC per unit of FC. (Random variable)
The value of the hedged cash flow at time T1
is given by V˜H,T1
= - VCS˜T1
+ VF
(Ft,T2
– F~ T1,T2
)
To minimize the variance of this, choose hedge ratio given by
HR = VF/VC = COV(S~ T1, F
~ T1T2) / VAR(F~
T1T2)
We need forward-looking estimates of these parameters.
Using past data estimate a regression equation:
S~T1 = + F~T1T2 + u
The estimate of can be used as hedge ratio. But this would be a
historical estimate.
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• Let us apply this result to the Swiss firm's case.
• Assume that we have somehow obtained estimates of the
covariance of S˜T1 and F˜T1,T2 and the variance of F˜T1,T2.
• Their ratio is 0.90.
• Then the USD value of the futures position must be
(500,0000.90) = USD 450,000.
• At the futures price of $0.6888/CHF this translates into
CHF 653310.10.
• With each contract being CHF 125,000 this is equivalentto 5.23 contracts rounded off to 5 or 6 contracts.
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The interest parity relation tells us that [1 + rB(T-t)]
Ft,T2
(A/B) = St(A/B) ----------------- = k S
t(A/B)
[1 + rA(T-t)] [1 + rB(T-t)]
where k = ----------------- [1 + rA(T-t)]
If the factor k remains constant, then
(FT1,T2-Ft,T2) = k(ST1 - St)
and a hedge ratio VF/V
C= 1/k = would give a perfect hedge.
But k does not remain constant. Optimal hedge ratio keeps changing
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• Dynamic hedging: As interest rates and spot rate
keep changing, recalculate the optimal hedge ratio
and rebalance the hedge by selling more futures orbuying futures. How frequently?
• Transaction costs must be considered. Any gain
from frequent rebalancing must be weighed against
increased transaction costs.
• Large position, long duration of hedge, more
frequent rebalancing warranted.
• Standard-size problem cannot be circumvented.
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SPECULATION WITH CURRENCY FUTURES
• Open Position Trading
In April Spot EUR/USD: 1.5750
June Futures : 1.5925
September Futures: 1.6225
You do not think EUR will rise. It will fall.
You do not think EUR will rise so much.
How to profit from this view? Sell September.
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SPECULATION WITH CURRENCY
FUTURES
On September 10 the rates are :
Spot EUR/USD: 1.5940 September futures: 1.5950
Close out by buying a September contract.Profit USD(1.6225-1.5950) per EUR on 125000 EUR
= USD 3437.50 minus brokerage etc.
First view was wrong; EUR did appreciate but not as
much as implied by futures price.
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SPREAD TRADING
• Intercommodity Spread
In April : Spot EUR/USD : 1.5500 GBP/USD: 1.9000
September Futures: EUR: 1.5800 GBP: 1.8580
Your view: GBP is going to rise against EUR.
What should you do?
• Intracommodity Spread (Calender Spreads)
June EUR: 1.5800 September EUR : 1.7500Your view: Between June and September EUR will notrise so much. What should you do?
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INTEREST RATE FUTURES
Treasury Bill Futures A futures contract on US treasury bills is traded on
the CME. Its specifications are as follows: Product and Trading unit: 13 WEEK TREASURYBILL FUTURES 3-month (13-week) U.S. Treasury Bills having a face
value at maturity of $1,000,000 Point Description: ½ point = .005 = $12.50. A point
here is one basis point or (1/100)th of 1 percent.
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Trade Unit 3-month (13-week) U.S. Treasury Bills having a facevalue at maturity of $1,000,000
Settle Method Cash Settled
PointDescriptions
? point = .005 = $12.50
ContractListing
Mar, Jun, Sep, Dec, Four months in March quarterlycycle plus 2 months not in the March cycle (serialmonths).Current Listings
Strike PriceInterval
N/A
ProductCode
Clearing=T1Ticker=TB
GLOBEX=GTB
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T-Bill Futures Contract on CME….
• The dollar value of a point represents interest at 0.01%
p.a. on $1 million for a period of 3 months, which works
out to $25. • Contract Listings: Mar, Jun, Sep, Dec, Four months in March quarterly cycle plus 2 two months
not in the March cycle (serial months).
• The short must deliver a US T-bill with face value USD 1
mio, with 90, 91 or 92 days to maturity.
• Futures price stated as: 100.000-Discount yield • Rates rise, price falls; rates fall, price rises.
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Three Month Euro (EURIBOR) Interest Rate Futures
Contract (LIFFE)
Unit of trading: €1,000,000
Delivery months: March, June, September, December, and
four serial months, such that 25 delivery months are available
for trading, with the nearest six delivery months beingconsecutive calendar months
Quotation: 100.00 minus rate of interest
Minimum price movement (tick size and value): 0.005 ( €12.50)
Last trading day: Two business days prior to the third
Wednesday of the delivery month
Delivery day: First business day after the Last Trading Day
Trading hours: 07:00 – 21:00
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THE EURODOLLAR DEPOSIT CONTRACT
• The underlying asset is a 3-month Eurodollar deposit
of USD 1 million beginning on expiry date of futures.
• Contract price is stated as (100-Implied Interest Rate)
•
May be cash settled only or both cash settled andphysical delivery. If latter, long is actually assigned a
deposit at a eurobank.
• As interest rate rises, contract price falls. As rates fall,
contract price rises.
• To hedge against falling rates, buy futures; to hedge
against rising rates sell futures
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CME Eurodollar Futures
Trade Unit : Eurodollar Time Deposit having a principal
value of $1,000,000 with a three-month maturity.
Settle Method : Cash Settled
Point Size :1 point = 0.01 = $25.00
Tick Size (Min Fluctuations)
SGX : Half Tick 0.005=$12.50 Quarter 0.0025=$6.25 for
nearest expiring month.
FLOOR : Half Tick 0.005=$12.50 Quarter 0.0025=$6.25 for
nearest expiring month.
GLOBEX : Half Tick 0.005=$12.50 Quarter 0.0025=$6.25 for
nearest expiring month.
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INTEREST RATE FUTURES QUOTATIONS 29 JUNE, 2010
____________________________________________
Expiry Open Sett Change High Low Open
Month Interest
Euribor MAR11 98.92 98.94 +0.03 98.96 98.92 503091
Euribor JUN11 98.87 98.88 +0.03 98.90 98.87 353521
Sterling DEC10 99.04 99.04 +0.01 99.07 99.03 363713
Sterling MAR11 98.96 98.97 +0.02 99.01 98.96 326657
Sterling JUN11 98.84 98.84 +0.03 98.88 98.81 302845
Euro$ AUG10 99.370 99.39 -0.005 99.395 99.370 11901
Euro$ NOV10 99.245 99.24 --- 99.245 99.235 545
Euro$ MAR11 99.150 99.16 +0.010 99.165 99.130 823929
Euro$ JUN11 99.050 99.07 +0.020 99.075 99.040 864090
Euro¥ DEC10 99.635 99.645 +0.005 99.645 99.635 222300
Euro¥ MAR11 99.640 99.650 +0.010 99.650 99.635 155336
Euro¥ JUN11 99.640 99.650 +0.010 99.655 99.635 132474
____________________________________________
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DECEMBER 3, 2008
INTEREST RATE FUTURES DECEMBER 3 2008
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INTEREST RATE FUTURES DECEMBER 3, 2008
LONG TERM INTEREST RATE FUTURES
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LONG TERM INTEREST RATE FUTURES
• The CBT contract on US T-bonds and T-notes;
LIFFE contract on UK guilts. DTB contract onGerman Bunds etc.
• The short must deliver a long term bond from
among a set of eligible bonds -”Basket Delivery”
• The CBT contract on US T-bonds: Underlying is a
notional T-bond with 15 years to maturity and 8%
YTM.
•Exchange calculates a conversion factor for all
eligible bonds.
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LONG TERM INTEREST RATE FUTURES
For US T-bond futures, price stated as % of face value with
minimum 1/32% e.g.
Price : 103-18 means 103 and (18/32) percent of $100000
Long pays: Settlement Price × Conversion factor
+ Accrued Interest
Conversion Factor necessary because different bonds have
different coupons and maturities.
An eligible bond has CF of 1.5 - Each of these bonds equals 1.5
of notional bonds.
30 Year U.S. Treasury Bonds Futures
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Contract Size
One U.S. Treasury bond having a face value at maturity of $100,000 or multiple thereof.
Deliverable Grades
U.S. Treasury bonds that, if callable, are not callable for at least 15 years from the first day of the delivery month or, if not callable,
have a maturity of at least 15 years from the first day of the delivery month. The invoice price equals the futures settlement price
times a conversion factor plus accrued interest. The conversion factor is the price of the delivered bond ($1 par value) to yield 6
percent.
Tick Size
Minimum price fluctuations shall be in multiples of one-half of one thirty second point per 100 points ($15.625 per contract) except
for intermonth spreads, for which minimum price fluctuations shall be in multiples of one-fourth of one thirty-second point per 100
points ($7.8125 per contract). Par shall be on the basis of 100 points. Contracts shall not be made on any other price basis.
Price Quote
Points ($1,000) and one-half of 1/32 of a point; i.e., 80-16 equals 80-16/32, 80-165 equals 80-16.5/32.
Contract Months
Mar, Jun, Sep, Dec
Last Trading Day
Seventh business day preceding the last business day of the delivery month. Trading in expiring contracts closes at noon, Chicago
time, on the last trading day.
Last Delivery Day
Last business day of the delivery month.
Trading Hours
Open Auction: 7:20 am - 2:00 pm, Chicago time, Monday - Friday
Electronic: 5:30 pm - 4:00 pm, Chicago time, Sunday - Friday
Trading in expiring contracts closes at noon, Chicago time, on the last trading day
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30-YEAR T-BOND FUTURES QUOTES
Thursday, 4 December
Contract Last Change Open High Low Prev.Stl.
Dec '08 132-310 +0-245 132-090 132-310 132-010 132-065
Mar '09 131-305 +0-230 130-315 131-315 130-150 131-075
Jun '09) 130-250 +0-230 0-000 130-250 130-020 130-020
Sep '09 129-135 +0-230 0-000 129-135 128-225 128-225
Dec '09 128-015 +0-230 0-000 128-015 127-105 127-105
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Hedging a Commercial Paper Issue.
•In January a corporation finalises its plans to make an issue
of $50 million 90-day commercial paper around mid May.
•Paper of comparable quality is now yielding 12.05%.
•At this yield the company hopes to realise $48,493,750.
•To protect itself against the possibility that rates may rise
before its issue hits the market decides to hedge using
EURO$ futures.
• June futures currently quoted at 88.75
• What should it do?
S C A O S A
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SPECULATION WITH INTEREST RATE
FUTURES
Open Position Trading
On September 1, December eurodollar futures on the IMM is
trading at 89.25. A trader believes that short term interest rates
are going to fall very soon. He buys a December contract at89.25. On subsequent days, the prices and consequent
losses/gains are :
Day 1: 89.35 (+$250) Day 2: 89.32 (-$75)
Day 3: 89.45 (+$325) Day 4: 89.47 (+$50)
Day 5: 89.45 (-$50) Day 6: 89.50 (+$125) Liquidates position.
Total gain: $625 minus brokerage commissions.
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An Intra-Contract Spread Trade
On February 25 the following prices are quoted for T-bill
futures on the IMM :
March : 96.02
June : 95.25
September : 94.50December : 93.00
A trader feels that the yield curve is going to become
flatter. He has no particular ideas about how interest
rates as a whole are going to change but he is confidentthat long term rates will be lower relative to short-term
rates than they are now.
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Intra-Contract Spread Trade….. If his prediction comes true the spread between near
and far contracts will narrow. To profit from this hemust sell a near contract and buy a far contract. (”sell
a spread"). He sells a September contract at 94.50 and
buys a December contract at 93.00.
By August 10, rates have fallen, yield curve is flatter:
September: 95.50 December: 94.75
Close out. Buy September sell December. Net gain 75 ticks or
USD 1875 minus brokerage.
Better strategy: Sell T-bill futures buy T-bond futures.