Quiz 20: Foreign Currency Futures and Options


A trader sold the Swiss franc futures contract; exchange rate is being provided in order to determine the cash flow. Following is the information related to the exchange rate: img From the given information, it is clear that the trader had taken short position in Swiss franc; in this case the trader would earn profit only if the Swiss franc depreciates and will lose when the Swiss franc appreciates. Since there is no information about the margin account, thus assume that the initial margin balance would be $1,000. Whenever the future prices increases, it will be loss for the trader. img

The main difference between the futures contract and the forward contract is that the futures contract is traded through the exchange whereas forward contract is actually made by the banks and their respective clients. The contract size of the futures contract is standardized whereas forward contract is tailor made. A company can buy or sell a contract only in the specified contract size, which brings in more liquidity and facilitate easy trading. Futures contract has specific exercise date which is maturity date, whereas in forward contract the clients can request for exercise date before the maturity date of contract or else it will be automatically get exercised on maturity date, but mostly 30, 60, 90,180 and 360 days are used as maturity date. The credit risk in case of futures market is well managed by the exchange as the intermediary whereas the forward contract suffers from the credit risk of their respective counterparty default at any time. In case of futures contract all the parties are required to deposit money in the margin account to fulfil the requirements of the initial margin which will cover any future losses. Futures contract are marking to market, whereas in forward contract the profit or loss will be determined only at the time of maturity and no marking to market.

Various option prices for Australian dollar and British pounds are provided to determine the option price for British pound call option with strike price 155. Below table discloses about the call option and put option values: img From the given information, it is clear that the trader has to buy the British pounds call option with the strike price of 155 with October maturity on September 16. In this case, the trader has to pay 1.50 cents per unit which is clear from the given table. The trader has to pay the amount which is disclosed under the call option of British Pounds with the strike price of 155 Oct. Thus, the amount to be paid is 1.50 cents per unit, in terms of pounds is determined by dividing by 100, £0.015 per unit. Total amount to be paid per contract is determined by multiplying the price per unit with the contract size. img Thus, the amount to be paid for contract size is £468.75.

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