CHAPTER7FUTURESANDOPTIONSONFOREIGNEXCHANGESUGGESTEDANSWERSANDSOLUTIONSTOENDOFCHAPTER
QUESTIONSANDPROBLEMS
QUESTIONS
1Explai
thebasicdiffere
cesbetwee
theoperatio
ofacurre
cyforwardmarketa
dafuturesmarket
A
swerTheforwardmarketisa
OTCmarketwheretheforwardco
tractforpurchaseorsaleofforeig
curre
cyistailormadebetwee
theclie
ta
ditsi
ter
atio
alba
kNomo
eycha
gesha
dsu
tilthematuritydateoftheco
tractwhe
deliverya
dreceiptaretypicallymadeAfuturesco
tractisa
excha
getradedi
strume
twithsta
dardizedfeaturesspecifyi
gco
tractsizea
ddeliverydateFuturesco
tractsaremarkedtomarketdailytoreflectcha
gesi
thesettleme
tpriceDeliveryisseldommadei
afuturesmarketRatherareversi
gtradeismadetocloseoutalo
gorshortpositio
2I
orderforaderivativesmarkettofu
ctio
mostefficie
tlytwotypesofeco
omicage
tsare
eededhedgersa
dspeculatorsExplai
A
swerTwotypesofmarketparticipa
tsare
ecessaryfortheefficie
toperatio
ofaderivativesmarketspeculatorsa
dhedgersAspeculatorattemptstoprofitfromacha
gei
thefuturespriceTodothisthespeculatorwilltakealo
gorshortpositio
i
afuturesco
tractdepe
di
gupo
hisexpectatio
soffuturepricemoveme
tAhedgero
theotherha
ddesirestoavoidpricevariatio
bylocki
gi
apurchasepriceoftheu
derlyi
gassetthroughalo
gpositio
i
afuturesco
tractorasalespricethroughashortpositio
I
effectthehedgerpassesofftheriskofpricevariatio
tothespeculatorwhoisbetterableoratleastmorewilli
gtobearthisrisk
3Whyaremostfuturespositio
sclosedoutthroughareversi
gtraderathertha
heldtodelivery
A
swerI
forwardmarketsapproximately90perce
tofallco
tractsthatarei
itiallyestablishedresulti
theshortmaki
gdeliverytothelo
goftheassetu
derlyi
gtheco
tractThisis
aturalbecausethetermsofforwardco
tractsaretailormadebetwee
thelo
ga
dshortByco
trasto
lyabouto
eperce
tofcurre
cyfuturesco
tractsresulti
deliveryWhilefuturesco
tractsareusefulforspeculatio
a
dhedgi
gtheirsta
dardizeddeliverydatesmakethemu
likelytocorrespo
dtotheactualfuturedateswhe
foreig
excha
getra
sactio
swilloccurThustheyarege
erallyclosedouti
areversi
gtradeI
factthecommissio
that
IM1
fbuyersa
dsellerspaytotra
sacti
thefuturesmarketisasi
gleamou
tthatcoverstherou
dtriptra
sactio
sofi
itiati
ga
dclosi
goutthepositio
4Howca
theFXfuturesmarketbeusedforpricediscovery
A
swerTotheexte
tthatFXforwardpricesarea
u
biasedpredictoroffuturespotexcha
geratesthemarketa
ticipateswhethero
ecurre
cywillappreciateordepreciateversusa
otherBecauseFXfuturesco
tractstradei
a
expiratio
cyclediffere
tco
tractsexpireatdiffere
tperiodicdatesi
tothefuturr