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Clearinghouse ( Forward contracts are created by mercial and investment banks, whereas futures contracts are usually found on futures exchanges) Maturity Negotiated 3rd week of the month (US) Amount Negotiated Standard contract size Fees Bidask Commissions Collateral Negotiated Margin account Settlement At maturity Most are settled early Futures exchanges ? Financial futures exchanges are usually associated with a modity futures exchange 2022 volume Top 5 futures exchanges (million contracts) Eurex Eurex (Germany amp。 Chapter 2 Derivative Securities for Currency Risk Management—— Currency Futures and Futures Markets Chapter Overview ? 1 Financial Futures Exchanges ? 2 The Operation of Futures Markets ? 3 Futures Contracts ? 4 Forward versus Futures Market Hedges ? 5 Futures Hedges Using Cross Exchange Rates ? 6 Hedging with Currency Futures Chapter Objectives ? This chapter pares currency futures contracts to currency forward contracts and shows how they are priced by the marketplace. Emphasis is placed on how currency futures contracts are similar to, and yet different from, forward contracts.. ? The last several sections discuss implementation issues: Delta hedges for maturity mismatches Cross hedges for currency mismatches Deltacross hedges for currency and maturity mismatches Forward Market 1. Forward Contracts A forward contract is an agreement between a corporation and a mercial bank to exchange a specified amount of a currency at a specified exchange rate (called the forward rate) and on a specified future date. When MNCs anticipate a future need for or future receipt of a foreign currency, they can set up forward contracts to lock in the rate at which they can purchase or sell a particular foreign currency. A forward hedge of the dollar Underlying position of a French exporter (long $s) Sell $s forward at Ft€/$ (short $s and long €s) Net position +$40 million +€40 million $40 million +€40 million Goods v€/$ Long $s s€/$ Short $s The forward contract provides a perfect hedge because the size and timing of the hedge transaction exactly offsets the size and timing of the underlying exposure. Forward Market 2. NonDeliverable Forward Contracts a. New type ? A nondeliverable forward contract (NDF) does not result in an actual exchange of currencies. Instead, one party makes a payment to the other based on a market exchange rate on the day of settlement. b. Frequently used for currency in emerging markets c. No delivery required d. One party to the agreement makes a payment to the other party based on the exchange rate at the future date. ? An NDF can effectively hedge future foreign currency payments or receipts: NDF Market Expect need for 100M Chilean pesos. Negotiate an NDF to buy 100M Chilean pesos on Jul 1. Reference index (closing rate quoted by Chile’s central bank) = $.0020/peso. April 1 Buy 100M Chilean pesos from market. July 1 Index = $.0023/peso ? receive $30,000 from bank due to NDF. Index = $.0018/peso ? pay $20,000 to bank. Forward versus Futures Co