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    Currency Derivatives: Forward Rate Spot Rate Spot Rate X N (Number of Day Maturity)

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    afni
    Currency derivatives are complex financial instruments used to hedge or speculate on currency risk. They include options, futures, and swaps, and their value is based on underlying assets and influenced by interest rates, maturity, and volatility. Currency derivatives are tailored to customer needs and traded over-the-counter. Common types are forward contracts for exchanging currencies at a future date, future contracts traded on exchanges, and option contracts that give the right but not obligation to exchange currencies. Strategies using currency derivatives include hedging to reduce risk or speculation to profit from anticipated price changes. Advantages are avoiding currency risk and changing currency flows over time, while disadvantages include lack of a marketplace and potential unlimited losses from options.

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    Currency Derivatives: Forward Rate Spot Rate Spot Rate X N (Number of Day Maturity)

    Uploaded by

    afni
    34 views2 pages
    Currency derivatives are complex financial instruments used to hedge or speculate on currency risk. They include options, futures, and swaps, and their value is based on underlying assets and influenced by interest rates, maturity, and volatility. Currency derivatives are tailored to customer needs and traded over-the-counter. Common types are forward contracts for exchanging currencies at a future date, future contracts traded on exchanges, and option contracts that give the right but not obligation to exchange currencies. Strategies using currency derivatives include hedging to reduce risk or speculation to profit from anticipated price changes. Advantages are avoiding currency risk and changing currency flows over time, while disadvantages include lack of a marketplace and potential unlimited losses from options.

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    MKI 5

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    Currency derivatives are complex financial instruments used to hedge or speculate on currency risk. They include options, futures, and swaps, and their value is based on underlying assets and influenced by interest rates, maturity, and volatility. Currency derivatives are tailored to customer needs and traded over-the-counter. Common types are forward contracts for exchanging currencies at a future date, future contracts traded on exchanges, and option contracts that give the right but not obligation to exchange currencies. Strategies using currency derivatives include hedging to reduce risk or speculation to profit from anticipated price changes. Advantages are avoiding currency risk and changing currency flows over time, while disadvantages include lack of a marketplace and potential unlimited losses from options.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    34 views2 pages

    Currency Derivatives: Forward Rate Spot Rate Spot Rate X N (Number of Day Maturity)

    Uploaded by

    afni
    Currency derivatives are complex financial instruments used to hedge or speculate on currency risk. They include options, futures, and swaps, and their value is based on underlying assets and influenced by interest rates, maturity, and volatility. Currency derivatives are tailored to customer needs and traded over-the-counter. Common types are forward contracts for exchanging currencies at a future date, future contracts traded on exchanges, and option contracts that give the right but not obligation to exchange currencies. Strategies using currency derivatives include hedging to reduce risk or speculation to profit from anticipated price changes. Advantages are avoiding currency risk and changing currency flows over time, while disadvantages include lack of a marketplace and potential unlimited losses from options.

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    of 2

    Nur Afni Latin

    C1B014024
    International Financial Management

    Currency Derivatives
    Currency derivatives are complex financial instrumens and this is a collective term for
    instruments such as options, futures and swaps. The derivatives value is based on he underlying
    assets; the price is influenced partly by the interest rate, remaining maturity and volatility. The
    characteristic of a derivative is that it is linked to events or conditions at a specified time or
    period in the future.
    How currency derivatives work ? currency derivatives are used to hedge a future payment
    or receivable in a foreign currency or to change a currency exposure over time. A currency
    derivative primarily reflecs the interest spread between its component currencies. A currency
    derivative is tailored to customer needs regarding maturity, level, amount, and more. It is usually
    an unlisted instrument and is traded Over The Counter (OTC).
    Basic of currency trading :
    Forward Contract : agreements to exchange currencies at an agreed rate on a specified
    future date, actual settlement date is more than two working days after he deal date, forward
    contracts are privately negotiated, traded outside an exchange and suffer from counter party and
    liquidity risks. Forward contracs are often valued at $1 million or more, and not normally used
    by consumers or small firms. As with the case of spot rates, there is a bid/ask spread on forward
    rates. Forward rates may also contain a premium or discount, if the forward rate ecxceeds the
    existing spot rate, it contains a premium; if the forward rate is less than the existing spot rate, it
    contain a discount.
    Annualized

    forward

    premium/discount

    forward ratespot rate


    360
    x
    spot rate
    n (number of day maturity )
    Future Contracts : these are agreements to buy or sell an asset for a certain price at a
    future time, exchange traded and standardized contracts, no counter party risk as settlement is
    guaranteed by the exchange. To minimize its risk in such a guarantee, the exchange imposes
    margin requirements to cover fluctuations in he value of the contracts. Future contacts specify a
    standard volume of a particular currency to be exchanged on a specific settlement date, typically
    the third Wednesday in March, June, September and December. They are used by MNCs to

    hedge their currency positions, and by speculators who hope to capitalize on heir expectation of
    exchange rate movements.
    Option Contracts : traders can also buy currency option contracts, and here he commits
    for a future exchange of currency with an agreement that the contract will be valid only if the
    price is favorable. Pays a premium for this.
    Strategis using currency trading :
    1. Hedging, means taking a position in the future market that is opposite to a
    position in the physical market with a view to reduce or limit the risk associated
    with the unpredictable changes in the exchange rate.
    Types of hedging : short hedge and long hedge.
    2. Speculation, is to take risks and profit from anticipated price changes in futures
    price of an asset.
    Types of speculation : long position and short position.
    Advantages and disadvantages of currency derivatives :
    1. A currency forward enables you to avoid currency risk during the hedge period.
    2. With a currency swap, you can change currency flows over time.
    3. Currency forwards and currency swaps are not traded over a marketplace, but are
    tailored a specified risk
    4. They can produce yields regardless of whether he market rises, falls or remains
    unchanged.
    5. Currency swaps are appropriate as a risk distribution tool, since they;
    6. Can be used to protect a holding
    7. Can produce a higher yield with a lower capital investment than normally
    required for an equivalent transaction directly in the underlying currency pair.
    8. Create the opportunity to realize a profit in an underlying asset, while also
    profiting from further prices rises.
    9. They require extensive monitoring of the price performance in the derivative
    instrument and the underlying exchange rate.
    10. The risk of loss may be unlimited when issuing options.

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