FINC 327 Chapter 5: Currency Derivatives Flashcards Preview

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Flashcards in FINC 327 Chapter 5: Currency Derivatives Deck (10)
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1

A forward contract

A forward contract is an agreement between a corporation and a financial institution (such as a
commercial bank) to exchange a specified amount of a currency at a specified exchange
rate (called the forward rate) on a specified date in the future.

2

How could Multinational corporations use forward contracts to hedge their imports. (Making payments)

They can lock in at a LOWER rate at which they obtain a currency needed to purchase those imports.
Goal is to pay less for imports by using a depreciated currency
Short Spot in currency
Long forward

3

How could Multinational corporations use forward contracts to hedge their exports. (receiving payments)

Hoping that the rate will be higher!!
to avoid currencies depreciating
Long in currency spot
Short forward

4

Hedging

use futures to reduce risk on an existing position

5

Speculation

use futures to take on risk in the hope of making profit

6

Arbitrage

use the difference between spot and futures prices to generate risk free profit

7

FORWARD speculation profits long and short sides

long side: upward sloping
short side: downward sloping

8

premium and discount of forward rates

(Ft - So ) / S * 360/#of days

negative is discount
positive is premium

9

SWAPs

spot transaction with a corresponding forward contract that will reverse the spot transaction

so i give you pounds and you give me dollars.
then we agree on forward contract to reverse this transaction so we both get exact money we started with. no profit gains or losses

10

futures

standardized meaning they are tradable so future rates changes throughout the day.
long profit= (ft - Fo) * size