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3 Jan 2018

What are major characteristics of currency futures contracts? List at least five of them.

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Related questions

What are the major advantages of futures contracts compared to forwards? Why are futures contracts marked to market every day? Why are they standardized? What are the disadvantages of futures contracts?

We have futures contracts on Treasury bonds, but we do not have features contracts on individual corporate bonds. We have cattle and hog futures but no chicken futures. Explain why the market has developed in this manner. What do you think are the most important characteristics for the success of a new futures contract concept?

On July 2, an American firm elected to close out its account at a British bank on August 28. The firm is expected to have 5 million British pounds in the account at the time of closing. It will convert the funds to U.S. dollars and transfer the funds to a U.S. bank. The relevant spot foreign exchange rate is $1.2949. The September British pound futures contract is priced at $1.2930. Determine the outcome of a futures hedge if on August 28 the spot rate is $1.2715 and the futures rate is $1.2725. All prices are in U.S. dollars per British pound. The British pound futures contract covers 100,000 British pounds

a. What is the portfolio worth at the time of decision?

b. What is the value of the portfolio on August 28?

c. How much is the gain or loss on the currency position (must state if gain or loss and the amount)?

d. On July 2, how many contracts does the bank need? Do you go long or short the British pound futures contract? How much is one futures contract worth at time of decision?

e. On August 28, does the bank buy or sell the futures contracts? How much is one futures contract worth?

f. Is there is a gain or loss on the futures contract? If so, how much is the gain or loss on all the contracts combined?

g. On August 28, what is the net gain or loss on the combined currency position and the futures contracts (must state if gain or loss and the amount)?

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