EECS 3101 Lecture Notes - Lecture 41: Futures Contract, Pound Sterling
28 Jun 2018
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EECS 3101 Lecture 41 Notes
Introduction
Settlement date
Tacoma therefore purchases a futures contract specifying A $100,000 and a March
settlement date (which is March 19 for this contract).
On January 10, the futures contract is priced at $.53 per A$.
On February 15, Tacoma realizes that it will not need to order supplies because it has
reduced its production levels.
Therefore, it has no need for A$ in March.
It sells a futures contract on A$ with the March settlement date to offset the contract it
purchased in January.
At this time, the futures contract is priced at $.50 per A$.
On March 19 (the settlement date), Tacoma has offsetting positions in futures contracts.
However, the price when the futures contract was purchased was higher than the price
when an identical contract was sold, so Tacoma incurs a loss from these positions.
Tacoma’s transactions are summarized in Exhibit 5.4.
Move from left to right along the time line to review the transactions. The example does
not incorporate margin requirements.
Sellers of futures contracts can close out their positions by purchasing currency futures
contracts with similar settlement dates.
Most currency futures contracts are closed out before the settlement date.
Speculation with Currency Futures
Currency futures contracts are sometimes purchased by speculators who are simply
attempting to capitalize on their expectation of a currency’s future movement.
Suppose that speculators expect the British pound to appreciate in the future.
They can purchase a futures contract that will lock in the price at which they buy pounds
at a specified settlement date.
Document Summary
Tacoma therefore purchases a futures contract specifying a ,000 and a march settlement date (which is march 19 for this contract). Suppose that speculators expect the british pound to appreciate in the future. They can purchase a futures contract that will lock in the price at which they buy pounds at a specified settlement date. Therefore purchases a futures contract specifying a ,000 and a march settlement date (which is march 19 for this contract). On january 10, the futures contract is priced at $. 53 per a$. On february 15, tacoma realizes that it will not need to order supplies because it has reduced its production levels. Therefore, it has no need for a$ in march. It sells a futures contract on a$ with the march settlement date to offset the contract it purchased in january. At this time, the futures contract is priced at $. 50 per a$.
