Multinational Financial Management

Currency Futures and Options Markets

I dipt into the future far as human eye could see, Saw the vision of the world and all the wonder that would be.

ALFRED, LORD TENNYSON (1842)

LEARNING OBJECTIVES

• To explain what currency futures and options contracts are and to describe the organization of the markets in which these contracts are traded
• To distinguish between currency forward and futures contracts
• To distinguish between currency futures and options contracts
• To describe the advantages and disadvantages of futures contracts relative to forward contracts
• To explain how currency futures and options contracts can be used to manage currency risk and to speculate on future currency movements
• To identify the basic factors that determine the value of a currency option
• To read and interpret the prices of currency futures and options contracts as they appear in the Wall Street Journal

Foreign currency futures and options contracts are examples of the new breed of financial instrument known as derivatives. Financial derivatives are contracts that derive their value from some underlying asset (such as a stock, bond, or currency), reference rate (such as a 90-day Treasury bill rate), or index (such as the S&P 500 stock index). Popular derivatives include swaps, forwards, futures, and options. Chapter 7 discussed forward contracts, and Chapter 9 discusses swaps. This chapter describes the ...