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FX Futures & Options

FX Futures & Options. These “derivatives” or “contingent claims” are used for hedging or for speculation. How Futures Work. Currency Futures. Profit Functions. Futures Pricing . Because of their similarity, futures prices are also priced using the interest rate parity relationship. That is:.

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FX Futures & Options

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  1. FX Futures & Options These “derivatives” or “contingent claims” are used for hedging or for speculation

  2. How Futures Work

  3. Currency Futures

  4. Profit Functions

  5. Futures Pricing Because of their similarity, futures prices are also priced using the interest rate parity relationship. That is:

  6. Eurodollar Interest Rate Futures

  7. Options: A right but not an obligation, to buy/sell a marketable asset

  8. Aspects of Calls (C) and Put (P) Options

  9. Currency Options Markets

  10. Note: The CME also trades currency futures options (i.e. options on futures contracts), but these will not be discussed here.

  11. Call Payouts (Value) at Expiration • Long Call • Payout CT = 0 if ST < E, or ST – E if ST > E • Profits = max [ST – E, 0] – C0

  12. Put Payouts (Value) at Expiration • Long Put - buyer • Payout PT = E - ST if E > ST or 0 if ST > E • Profits = max [E - ST, 0] – P0

  13. Option Pricing Models

  14. Option Pricing Relationships Question: What happens to the time value as maturity approaches? Question: Why is the value of the call always greater than the payout?

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