Book contents
- Frontmatter
- Dedication
- Contents
- List of Tables, Figures and Boxes
- Foreword
- Preface to the First Edition
- Preface to the Second Edition
- Acknowledgements
- Part–I Introduction
- Part–II Forwards and Futures
- 3 Futures and Forwards
- 4 Futures Trading: Pricing and Hedging
- 5 Interest Rate Futures
- 6 Currency Futures
- 7 Futures on Equities
- Part–III Swaps
- Part–IV Options
- Part–V Other Derivatives and Derivative-like Instruments
- Part–VI Accounting, Taxation and Regulatory Framework
- Part–VII Portfolio Management and Management of Derivative Risks
- Bibliography
- Index
6 - Currency Futures
from Part–II - Forwards and Futures
Published online by Cambridge University Press: 02 August 2019
- Frontmatter
- Dedication
- Contents
- List of Tables, Figures and Boxes
- Foreword
- Preface to the First Edition
- Preface to the Second Edition
- Acknowledgements
- Part–I Introduction
- Part–II Forwards and Futures
- 3 Futures and Forwards
- 4 Futures Trading: Pricing and Hedging
- 5 Interest Rate Futures
- 6 Currency Futures
- 7 Futures on Equities
- Part–III Swaps
- Part–IV Options
- Part–V Other Derivatives and Derivative-like Instruments
- Part–VI Accounting, Taxation and Regulatory Framework
- Part–VII Portfolio Management and Management of Derivative Risks
- Bibliography
- Index
Summary
Any company or individual with dealings in foreign exchange, whether through imports or exports or through inward or outward investments, lending or borrowing, faces some degree of exchange rate risk. Currency forwards or futures are forward or futures contracts with a foreign currency as the underlying. Thus, a contract for the purchase of US dollars denominated in Indian rupees is effectively a contract on the Indian rupee – US dollar exchange rate (referred to as INR: USD). Currency forwards or futures can therefore also be referred to as exchange rate forwards or futures. The basic pricing and trading structure of currency futures and forwards is not different from examples of equity or commodity futures that were seen in previous chapters, but this chapter will explore some of the special features of currency forwards and futures in greater detail. In the foreign exchange markets, a three letter convention is commonly used to refer to currencies – INR for Indian Rupees, USD for US Dollars, GBP for Great Britain Pounds, JPY for Japanese Yen etc.
Typically, hedging needs of smaller firms and for short durations are served better by standardised exchange-traded futures, whereas larger firms with specialised needs and more long-term hedging requirements often go to the forward (OTC) market. Forward contracts are typically entered into through banks, either directly or through a foreign subsidiary. Many India-based multi-nationals, for example, access INR-USD OTC forwards of various kinds in the Singapore market.
Example 6.1
In March, P Ltd., an importer of paper and pulp machinery has a contractual requirement to pay USD 100 million in September, and any pre- or post-payment is not advantageous from an interest rate or liquidity point of view. The rupee revenue from selling these imported machines in the domestic (Indian) market is more or less predictable but P Ltd. still bears the currency risk due to the amount payable being denominated in a foreign currency. The current exchange rate is INR 60 per USD and the forward rate for September is also INR 60 per USD. (Interest rate on rupees and dollars is assumed to be zero in this example – thus there is neither a carrying cost nor a yield.)
- Type
- Chapter
- Information
- Derivatives , pp. 113 - 119Publisher: Cambridge University PressPrint publication year: 2017