Chapter 5
Currency Derivatives
Lecture Outline
Forward Market
How MNCs Use Forward Contracts
Bank Quotations on Forward Rates
Premium or Discount on Forward Rate
Offsetting a Forward Contract
Using Forward Contracts for Swap Transactions
Non-Deliverable Forward Contracts
Currency Futures Market
Contract Specifications
Trading Currency Futures
Credit Risk of Currency Futures Contracts
Comparing Currency Futures Contracts to Forward Contracts
How MNCs Use Currency Futures Contracts
Speculation with Currency Futures
Currency Options Market
Currency Options Exchanges
Over-the-Counter Currency Options Market
Currency Call Options
Factors Affecting Call Option Premiums
How MNCs 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
Other Forms of 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 purposes. 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. What advantage do currency options offer that are not available with futures or forward contracts?
2. What are some disadvantages of currency option contracts?
3. Why do currency futures prices change over time?
4. Why do currency options prices change over time?
5. 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.