The goals of this chapter are: To describe futures contracts and show how they circumvent the problems of forward contracts, to compare forward and futures markets, to describe swaps and introduce some terminology. | Chapter 6 Currency Futures and Swaps Objectives To describe futures contracts and show how they circumvent the problems of forward contracts. To compare forward and futures markets. To describe swaps and introduce some terminology. Definition Currency futures contracts represent an obligation of the seller to deliver a certain amount of a specified currency in the future at an exchange rate determined now. Problems of Forward Contracts Non-standard contract dimensions Default risk Lack of liquidity Using a Forward Contract C A Forward contract JPY Goods B AUD JPY Tendency to Default on a Forward Contract A tends to default A B USD 1 million Forward rate = AUD million C Spot rate = USD 1 million AUD million Tendency to Default on a Forward Contract (cont.) B tends to default USD 1 million Forward rate = AUD million Spot rate = USD 1 million AUD million A B C Tendency to Default on a Forward Contract (cont.) Neither tends to default A B USD 1 million Forward rate = AUD million C Spot rate = Spot rate = USD 1 million AUD million USD 1 million AUD million Unwinding a Forward Contract C A Compensation JPY Compensation D AUD (a) Assigning the obligation to another counterparty (D) Unwinding a Forward Contract (cont.) C A (b) Cancelling the forward contract Cancellation fee Unwinding a Forward Contract (cont.) C A (c) Entering an offsetting position with E E AUD AUD JPY JPY How Futures Contracts Solve These Problems Standardised contract dimension Default risk is controlled by the clearing corporation and some regulations They are liquid The Role of the Clearing Corporation in Futures Trading A B USD USD AUD AUD Clearing corporation (exchange) A Comparison of Forward and Futures Markets Market size Market structure Contract size Traded currencies A Comparison of Forward and Futures Markets (cont.) Cross rates Exchange rate fluctuations Maturity dates Maturity lengths A Comparison of Forward and Futures Markets | Chapter 6 Currency Futures and Swaps Objectives To describe futures contracts and show how they circumvent the problems of forward contracts. To compare forward and futures markets. To describe swaps and introduce some terminology. Definition Currency futures contracts represent an obligation of the seller to deliver a certain amount of a specified currency in the future at an exchange rate determined now. Problems of Forward Contracts Non-standard contract dimensions Default risk Lack of liquidity Using a Forward Contract C A Forward contract JPY Goods B AUD JPY Tendency to Default on a Forward Contract A tends to default A B USD 1 million Forward rate = AUD million C Spot rate = USD 1 million AUD million Tendency to Default on a Forward Contract (cont.) B tends to default USD 1 million Forward rate = AUD million Spot rate = USD 1 million AUD million A B C Tendency to Default on a Forward Contract (cont.) Neither tends to default A B USD 1 million
