Fundamentals of Financial Management
Chapter 5
Currency Derivatives Lecture Outline
Forward Market
How MNCs Can Use Forward Contracts Non-Deliverable Forward Contracts
Currency Futures Market
Contract Specifications Trading Futures Comparison of Currency Futures and Forward Contracts Pricing Currency Futures Credit Risk of Currency Futures Contracts Speculation with Currency Futures How Firms Use Currency Futures Closing Out a Futures Position Transaction Costs of Currency Futures
Currency Call Options
Factors Affecting Call Option Premiums How Firms Use Currency Call Options Speculating with Currency Call Options
Currency Put Options
Factors Affecting Currency Put Option Premiums Hedging with Currency Put Options Speculating with Currency Put Options
Contingency Graphs for Currency Options Conditional Currency Options European Currency Options
Chapter Theme
This chapter provides an overview of currency derivatives, which are sometimes referred to as “speculative.” Yet, firms are increasing their use of these instruments for hedging. The chapter does give speculation some attention, since this is a good way to illustrate the use of a particular instrument based on certain expectations. However, the key is that students have an understanding why firms would consider using these instruments and under what conditions they would use them.
Topics to Stimulate Class Discussion
1. Why would a firm ever consider futures contracts instead of forward contracts? 2. What advantage do currency options offer that are not available with futures or forward contracts? 3. What are some disadvantages of currency option contracts? 4. Why do currency futures prices change over time? 5. Why do currency options prices change over time? 6. Set up several scenarios, and for each scenario, ask students to determine whether it would be better for the firm to purchase (or sell) forward contracts, futures contracts, call option contracts, or put options contracts.
Critical debate: Hedging
Currency Derivatives Lecture Outline
Forward Market
How MNCs Can Use Forward Contracts Non-Deliverable Forward Contracts
Currency Futures Market
Contract Specifications Trading Futures Comparison of Currency Futures and Forward Contracts Pricing Currency Futures Credit Risk of Currency Futures Contracts Speculation with Currency Futures How Firms Use Currency Futures Closing Out a Futures Position Transaction Costs of Currency Futures
Currency Call Options
Factors Affecting Call Option Premiums How Firms Use Currency Call Options Speculating with Currency Call Options
Currency Put Options
Factors Affecting Currency Put Option Premiums Hedging with Currency Put Options Speculating with Currency Put Options
Contingency Graphs for Currency Options Conditional Currency Options European Currency Options
Chapter Theme
This chapter provides an overview of currency derivatives, which are sometimes referred to as “speculative.” Yet, firms are increasing their use of these instruments for hedging. The chapter does give speculation some attention, since this is a good way to illustrate the use of a particular instrument based on certain expectations. However, the key is that students have an understanding why firms would consider using these instruments and under what conditions they would use them.
Topics to Stimulate Class Discussion
1. Why would a firm ever consider futures contracts instead of forward contracts? 2. What advantage do currency options offer that are not available with futures or forward contracts? 3. What are some disadvantages of currency option contracts? 4. Why do currency futures prices change over time? 5. Why do currency options prices change over time? 6. Set up several scenarios, and for each scenario, ask students to determine whether it would be better for the firm to purchase (or sell) forward contracts, futures contracts, call option contracts, or put options contracts.
Critical debate: Hedging