International Financial ManagementBekaert 2eSolutionsCh20Word下载.docx

1、1.How does a futures contract differ from a forward contract?Answer: Foreign currency futures contracts, or futures contracts for short, allow individuals and firms to buy and sell specific amounts of foreign currency at an agreed-upon price determined on a given future day. Although this sounds ver

2、y similar to forward contracts, there are a number of important differences between forward contracts and futures contracts.The first major difference between foreign currency futures contracts and forward contracts is that futures contracts are traded on an exchange, whereas forward contracts are m

3、ade by banks and their clients. Orders for futures contracts must be placed during the exchanges trading hours, and pricing occurs in the “pit” by floor traders or on an electronic trading platform where demand is matched to supply. In contrast to forward contracts, where dealers quote bid and ask p

4、rices at which they are willing either to buy or sell a foreign currency, for each party that buys a futures contract, there is a party that sells the contract at the same price. The price of a futures contract with specific terms changes continuously, as orders are matched on the floor or by comput

5、er.A second major difference is that futures exchanges standardize the amounts of currencies that one contract represents. Thus, futures contracts cannot be tailored to a corporations specific needs as can forward contracts. But the standardized amounts are relatively small compared to a typical for

6、ward contract, and if larger positions are desired, one merely purchases more contracts. Standardization with small contract sizes makes the contracts easy to trade, which contributes to market liquidity. A third major difference involves maturity dates. In the forward market, a client can request a

7、ny future maturity date, and active daily trading occurs in contracts with maturities of 30, 60, 90, 180, or 360 days. The standardization of contracts by the futures exchanges means that only a few maturity dates are traded. For example, IMM contracts mature on the third Wednesday of March, June, S

8、eptember, and December. These dates are fixed, and hence the time to maturity shrinks as trading moves from 1 day to the next, until trading begins in a new maturity. Typically, only three or four contracts are actively traded at any given time because longer-term contracts lose liquidity. The final

9、 major difference between forward contracts and futures contracts concerns credit risk. This issue is perhaps the chief reason for the existence of futures markets. In the forward market, the two parties to a forward contract must directly assess the credit risk of their counterparty. Banks are will

10、ing to trade with large corporations, hedge funds, and institutional investors, but they typically dont trade forward contracts with individual investors or small firms with bad credit risk. The futures market is very different. In the futures markets, a retail client buys a futures contract from a

11、futures brokerage firm, which in the United States is typically registered with the Commodity Futures Trading Commission （CFTC） as a futures commission merchant （FCM）. Legally, FCMs serve as the principals for the trades of their retail customers. Consequently, FCMs must meet minimum capital require

12、ments set by the exchanges and fiduciary requirements set by the CFTC. In addition, if an FCM wants to trade on the IMM, it must become a clearing member of the CME. In years past, clearing memberships used to be tradable, and the prices at which they traded were indications of how profitable future

13、s trading on the exchange was expected to be. In 2000, the CME became a for-profit stock corporation, and its shares now trade on the NYSE. To obtain trading rights, an FCM must buy a certain amount of B-shares of CME stock and meet all CME membership requirements.When a trade takes place on the exc

14、hange, the clearinghouse of the exchange, which is an agency or a separate corporation of a futures exchange, acts as a buyer to every clearing member seller and a seller to every clearing member buyer. The clearinghouse imposes margin requirements and conducts the daily settlement process known as

15、marking to market that mitigates credit concerns. These margin requirements are then passed on to the individual customers by the futures brokers.2.What effects does “marking to market” have on futures contracts? The process of marking to market implies that futures contracts have daily cash flows a

16、ssociated with them. One can be either long （having bought the contract） or short （having sold the contract） in the futures market at a particular price. Since both sides are treated symmetrically, lets assume you are long. You must post funds in a margin account, and if on subsequent days, the futu

17、res price moves in your favor, that is, the foreign currency futures prices rises as the foreign currency strengthens; funds are placed into your margin account and are taken out of the margin accounts of those who sold the foreign currency futures contract. This process continues every day until th

18、e maturity date of the contract.3.What are the differences between foreign currency option contracts and forward contracts for foreign currency? The primary difference between a foreign currency option contract and a forward contract is that the option contract gives the purchaser of the option, the

19、 right, but not the obligation to transact. If the state of the world in the future is favorable to the purchasers of the option, they will transact. If the state of the world is unfavorable, the option is worthless. Forward contracts are completely uncontingent on the state of the world in the futu

20、re.4.What are you buying if you purchase a U.S. dollar European put option against the Mexican peso with a strike price of MXN10.0/$ and a maturity of July? （Assume that it is May and the spot rate is MXN10.5/$.） A European put option gives you the right to sell the underlying asset at the strike pr

21、ice on the maturity date of the contract. Thus, you are buying the right to sell USD for MXN at the price of MXN10.0/$ on the maturity date of the contract in July. This option is currently said to be “out of the money” because the strike price is lower than the current exchange rate.5.What are you

22、buying if you purchase a Swiss franc American call option against the U.S. dollar with a strike price of CHF1.30/$ and a maturity of January? （Assume that it is November and the spot rate is CHF1.35/$.） American options can be exercised anytime between the purchase of the option and the maturity dat

23、e. Thus, a Swiss franc American call option against the U.S. dollar with a strike price of CHF1.30/$ and a maturity of January gives the buyer the right, but not the obligation, to purchase CHF with USD at a price of CHF1.30/$ between November and the maturity date in January. The option is currentl

24、y said to be “out of the money” because the strike price （expressed in dollars per Swiss franc） is higher than the current exchange rate （1/1.30） （1/1.35） and you are purchasing CHF.6.What is the intrinsic value of a foreign currency call option? What is the intrinsic value of a foreign currency put

25、 option? The immediate revenue from exercising an option is called the options intrinsic value. Let K be the strike price, and let S be the current spot rate, both in domestic currency per unit of foreign currency. Then, the intrinsic value per unit of foreign currency can be represented asCall opti

26、on: maxS K, 0Put option: maxK S, 0where max denotes the operation that takes the maximum of the two numbers between square brackets.7.What does it mean for an American option to be “in the money”? If an American option is “in the money,” its intrinsic value is positive. For a call option, this means

27、 that the strike price is less than the current market price; while for a put option, this means that the strike price is greater than the current market price.8.Why do American option values typically exceed their intrinsic values? The time value of an option is the current price or value of the op

28、tion minus its intrinsic value:Time value of an option = Option price Intrinsic valueOptions have time value because the stochastic evolution of the underlying asset price provides possibilities of even better payoffs in the future compared to the intrinsic value. If this were not the case, the owne

29、r of the American option would exercise it.9.Suppose you go long in a foreign currency futures contract. Under what circumstances is your cumulative payoff equal to that of buying the currency forward? The payoffs of futures contracts and forward contracts are only “essentially the same” because a s

30、light difference in payoffs arises due to the fact that interest is earned on future profits, or interest must be paid on future losses, in the marking to market process. Technically, if the path of short-term interest rates could be foreseenthat is, if there were no random changes in future short-t

31、erm interest ratesthere would be an arbitrage possibility if the forward exchange rate were different from the futures price because you would know how you could invest the profits or borrow to finance your losses. However, future interest rates are not known with certainty, so forward prices and fu

32、tures prices can be different, in theory. In practice, though, the price differentials are minimal, and they appear to be within the transaction costs of the forward market. Therefore, we argue that futures prices are “essentially the same” as forward prices.10.What is basis risk? The basis is the difference between the price of the futures contract at time t, for a particular maturity in the future,