ADMS 1000 Lecture Notes - Lecture 18: Futures Contract

• School: York University
• Department: Administrative Studies
• Course: ADMS 1000
• Professor: Alan Shapiro

Document Summary

If the currency depreciates then the value of the futures contract declines, allowing those speculators to benefit when they close out their positions. The premiums paid for currency options depend on various factors that must be monitored when anticipating future movements in currency option premiums. Since participants in the currency options market typically take positions based on their expectations of how the premiums will change over time, they can benefit from understanding how options are priced. The first step in pricing currency options is to recognize boundary conditions that force the option premium to be within lower and upper bounds. The currency depreciates then the value of the futures contract declines, allowing those speculators to benefit when they close out their positions. Futures contracts on a particular currency can be purchased by corporations that have payables in that currency and wish to hedge against its possible appreciation.