1. CurrencyCurrency
Futures andFutures and
ForwardsForwards
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2. OutlineOutline
• Meaning of Futures
• Features of Futures Contracts
• Using Futures for Hedging and
Speculation
• Meaning of Forwards
• Features of Forward Contracts
• Using Forwards for Hedging and
Speculation
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3. Futures ContractsFutures Contracts
• A futures contract is an agreement to buy
or sell a specified quantity of a specified
asset at a certain point in the future at a
price agreed upon today
• In the case of currencies, it is an
agreement to buy/sell a specified quantity
of a specific currency at a pre agreed upon
exchange rate at a certain time in the
future
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4. Currency FuturesCurrency Futures
• Trade on an organized exchange
• Futures contracts are standardized with
regard to the following
– The asset on which you trade a futures
contract
– The contract size
– Delivery arrangements
• Daily price movement limits-limit up and
limit down
• Position limits
• Mark to Market on a daily basis
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5. Corporate Use of CurrencyCorporate Use of Currency
FuturesFutures
• Hedge open positions in foreign currencies
by buying/selling currency futures
• Foreign currency cash inflows
– Risk: domestic currency may appreciate
– Strategy: sell foreign currency in the futures
market at the futures exchange rate (Short)
• Foreign currency cash outflows
– Risk: domestic currency may depreciate
– Strategy: buy foreign currency in the futures
market at the futures exchange rate (Long)
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6. Forward ContractsForward Contracts
• Agreement to buy or sell an asset at a
certain time in the future for a
predetermined price
• Over-the-counter product that do not
trade on any organized exchange
• Delivery date can be any date that is
mutually convenient to both the parties to
the contract
• Size can be customized
• Not marked-to-market daily
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7. Hedging and SpeculationHedging and Speculation
using Forwardsusing Forwards
• Expect a currency to appreciate
– Buy that currency forward (Long Position)
• Expect a currency to depreciate
– Sell that currency forward (Sell Position)
• Profit/Loss in a long position:
ST – K
• Profit/Loss in a short position:
K – ST
Where ST is the spot exchange rate at maturity and
K is the forward exchange rate at which you
buy/sell a currency forward.
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