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1
FOREIGN CURRENCY FUTURES
First, we review some aspects of the currencies cash markets with emphasis on the:
Interest Rates Parity.
We then review the currency futures markets with quasi-arbitrage and hedging examples.
2
FOREIGN CURRENCY: THE CASH MARKET
EXCHANGE RATES:
THE VALUE (PRICE) OF ONE CURRENCY IN TERMS OF ANOTHER CURRENCY IS THE EXCHANGE RATE BETWEEN THE TWO
CURRENCIES.
THERE ARE TWO QUOTE FORMATS FOR QUOTATIONS:
1. S($/FC)
THE NUMBER OF U.S. DOLLARS IN ONE UNIT OF THE FOREIGN CURRENCY.
2. S(FC/$)
THE NUMBER OF THE FOREIGN CURRENCY UNITS IN ONE U.S. DOLLAR.
3
NOT TAKING INTO ACCOUNT BID-ASK SPREAD:
get DM2. $1 sell , DM2.000/$ BIDS(DM/$)
cents. 48get DM1sell $.480/DM, BIDS($/DM)
3.pay DM2.08 $1buy , DM2.083/$ ASKS(DM/$)
cents. 50pay buy DM1 $.500DM, ASKS($/DM)
ASKS(FC/$)
1 BIDS($/FC)
BIDS(FC/$)
1 ASKS($/FC)
:QUOTESASK AND BID HAVEWEWHEN
.5945 S(BP/$)S(BP/$)
1 =
.5945
1 = 1.6821 = S($/BP)
S(FC/$)
1 = S($/FC)
4
CURRENCY CROSS RATES
LET FC1, FC2 AND FC3 DENOTE 3 DIFFERENT CURRENCIES. THEN IN THE ABSENCE OF
ARBITRAGE OPPORTUNITIES, THE FOLLOWING EQUALITY MUST HOLD:
DOLLAR ECU POUND SFRAC GUILDER PESO YEN LIRA DMARK FFRANC CDNDLR
CANADA 1.5462 1.8046 2.5672 1.1138 0.81383 0.15416 0.01269 0.00093 0.91784 0.27367
FRANCE 5.6499 6.5942 9.3805 4.0699 2.9738 0.5633 0.04639 0.00339 3.3539 3.6541
GERMANY 1.6848 1.9662 2.7969 1.2135 0.88668 0.16796 0.01383 0.00101 0.29876 1.0895
ITALY 1667 1945.6 2767.7 1200.8 877.41 166.2 13.686 989.55 295.05 1078.1
JAPAN 121.8 142.16 202.22 87.74 64.109 12.144 0.07307 72.302 21.558 78.774
MEXICO 10.03 11.706 16.653 7.2252 5.2792 0.08235 0.00602 5.9539 1.7753 6.4869
NEDERLAND 1.8999 2.2174 3.1544 1.3686 0.18942 0.0156 0.00114 1.1278 0.33627 1.2288
SWITZERLAND 1.3882 1.6202 2.3048 0.73067 0.1384 0.0114 0.00083 0.82405 0.2457 0.89781
U.K. 0.6023 0.70297 0.43387 0.31702 0.06005 0.00494 0.00036 0.35753 0.1066 0.38954
ECU 0.8568 1.4225 0.6172 0.45097 0.08542 0.00703 0.00051 0.50861 0.15165 0.55413
US 1.1671 1.6603 0.72036 0.52634 0.0997 0.00821 0.0006 0.59361 0.17699
KEY CURRENCY CROSS RATE NOV 12,1998
S(FC3/FC1)
S(FC3/FC2) =
S(FC2/FC3)
S(FC1/FC3) = S(FC1/FC2)
5
CURRENCY CROSS RATESEXAMPLE
.0997. 16.653
1.6603
S(Peso/BP)
S($/BP)
.0997. .6023
.06005
S(BP/$)
S(BP/Peso)
16.653. S(Peso/BP)1.6603 S($/BP) .0997; S($/Peso)
.S(FC2/FC3)
S(FC1/FC3) =
S(FC3/FC1)
S(FC3/FC2) = S(FC1/FC2)
BP. FC3 Peso; FC2$; Let FC1
6
AN EXAMPLE OF CROSS SPOT RATES ARBITRAGE
DOLLAR POUND CHF
SWITZERLAND 1.7920 2.8200 1.0000
U.K. 0.6394 1.0000 0.3546
U.S. 1.0000 1.5640 0.5580
THE CROSS RATE EQUALITIES DO NOT HOLD:
2.8200 < 2.8029 = .5580
1.5640 :BUT
S(CHF/BP) = S($/CHF)
S($/BP) :SIMILARLY
1.7920 1.8031 = .3546.6394 :BUT
S(CHF/$) = S(BP/CHF)
S(BP/$) :THEORY
8
DETERMINANTS OF FOREIGN EXCHANGE RATES
Most foreign currencies today, are determined in free exchange
markets, I.e., by supply and demand without any Government
intervention. In other words, the exchange rates of most countries
are floating rates.
Exchange rates are quoted for cash transactions as well as for forward
transactions.
9
Freely floating exchange rates.
No central bank intervention
Managed floating exchange rate.
The central bank takes part in the market to influence the exchange rate value.
Pegged exchange rate systems.
The value of one currency is fixed in terms of another currency, that itself floats.
Again, the central bank must operate in the market to ensure the pegged rate.
11
THE INTEREST RATES PARITY
Wherever financial flows are unrestricted, goods’ prices, the
forward prices of these goods and the interest rates in any two countries must maintain a
NO- ARBITRAGE relationship.
This relationship is called the
Interest Rates Parity.
Next, we derive the parity, using the cash-and-carry and the
reverse cash-and-carry strategies.
.S($/FC)e = F($/FC) t)- )(T R- (R FORDOM
12
NO ARBITRAGE: CASH-AND-CARRYTIME CASH FUTURES
t (1) BORROW $A. rDOM (4) SHORT FOREIGN
(2) BUY FOREIGN CURRENCY CURRENCY FORWARD Ft,T($/FC)
A/S($/FC) [=AS(FC/$)] AMOUNT:
(3) INVEST IN BONDS
DENOMINATED IN THE
FOREIGN CURRENCY rFOR
T (3) REDEEM THE BONDS (4) DELIVER THE CURRENCY TO
EARN CLOSE THE SHORT POSITION
(1) PAY BACK THE LOAN RECEIVE:
IN THE ABSENCE OF ARBITRAGE:
t)-(TrFORAS(FC/$)e
t)-(TrFORAS(FC/$)e
t)-(TrFORFC/$)eF($/FC)AS(t)-(TrDOMAe
t)-(Trt)(Tr FORD S(FC/$)e F($/FC)AAe
t)-)(Tr - (r FORDOMS($/FC)e F($/FC)
13
NO ARBITRAGE:
REVERSE CASH – AND - CARRYTIME CASH FUTURES
t (1) BORROW FC A. rFOR (4) LONG FOREIGN
(2) BUY DOLLARS CURRENCY FORWARD Ft,T($/FC)
AS($/FC) AMOUNT IN DOLLARS:
(3) INVEST IN T-BILLS
FOR RDOM
T REDEEM THE T-BILLS TAKE DELIVERY TO CLOSE
EARN THE LONG POSITION
PAY BACK THE LOAN RECEIVE
IN THE ABSENCE OF ARBITRAGE:
t)-(TR DOMAS($/FC)e
t)-(TrDOMAS($/FC)e
F($/FC)
AS($/FC)e t)-T(rDOMt)-(TrFORAe
t)-(TrFORAe F($/FC)
AS($/FC)e t)-T(rDOM
t)-T)(r(r FORDOMS($/FC)e F($/FC)
14
F($ / FC) = S($ / FC)e(R - R )(T - t)DOM FOR
FROM THE CASH-AND-CARRY STRATEGY:
F($/FC)
FROM THE REVERSE CASH-AND-CARRY STRATEGY:
t)-)(Tr - (r FORDOMS($/FC)e F($/FC)
THE ONLY WAY THE TWO INEQUALITIES HOLD SIMULTANEOUSLY IS BY BEING AN EQUALITY:
t)-)(Tr - (r FORDOMS($/FC)e
15
ON MAY 25 AN ARBITRAGER OBSERVES THE FOLLOWING MARKET PRICES:
S($/BP) = 1.5640 <=> S(BP/$) = .6393
F($/BP) = 1.5328 <=> F(BP/$) = .6524
RUS = 7.85% ; RGB = 12%
THE THEORETICAL FORWARD PRICE IS LESS THAN THE MARKET PRICE
CASH AND CARRY
TIME CASH FUTURES
MAY 25 (1) BORROW $100M AT 7. 85% SHORT BP 68,477,215 FORWARD
FOR 209 DAYS FOR DEC. 20, FOR $1.5328/BP
(2) BUY BP63,930,000
(3) INVEST THE BP63,930,000
IN BRITISH BONDS
DEC 20 RECEIVE BP68,477,215 DELIVER BP68,477,215
FOR $104,961,875.2
REPAY YOUR LOAN:
ARBITRAGE PROFIT: 104,961,875.2 - 104,597,484.3 = $364,390.90
NOTICE THAT: 104,597,484/68,477,215 = 1,5275,
BUT THIS EXCHANGE RATE CANNOT BE GUARANTEED ON MAY 25.
1.5273 = 1.5640e = F 365
209.12) - (.0785
lTheoretica
100Me = $104,597,484.3.0785
209
365
63,930,000e = 68,477,215.12
209
365
16
THE INTEREST RATES PARITY
So far, we derived the interest rates parity in a theoretical market. In the
real markets, buyers pay the ask price while sellers receive the bid
price. Moreover, borrowers pay the ask interest rate while lenders only
receive the bid interest rate. Therefore, in the real markets, it is possible for the forward exchange rate to fluctuate within a band of
rates without presenting arbitrage opportunities.Only when the market
forward exchange rate diverges from this band of rates arbitrage exists.
17
NO ARBITRAGE: CASH - AND - CARRYTIME CASH FUTURES
t (1) BORROW $A. rD,ASK (4) SHORT FOREIGN
(2) BUY FOREIGN CURRENCY CURRENCY FORWARD
A/SASK($/FC) FBID ($/FC)
(3) INVEST IN BONDS
DENOMINATED IN THE
FOREIGN CURRENCY rF,BID
T REDEEM THE BONDS DELIVER THE CURRENCY TO
EARN CLOSE THE SHORT POSITION
PAY BACK THE LOAN RECEIVE
IN THE ABSENCE OF ARBITRAGE:
t)-(TrASK
BIDF,($/FC)eA/S
t)-(TrBID
FOR$/FC)e($/FC)A/S(Ft)-(Tr ASKD,Ae
t)-(TrASKBID
t)(Tr BIDF,ASKD, ($/FC)e($/FC)A/S FAe
t)-)(Tr - (rASKBID
BIDF,ASKD,($/FC)eS ($/FC)F
t)-(TrASK
BIDF,($/FC)eA/S
18
NO ARBITRAGE:
REVERSE CASH - AND - CARRYTIME CASH FUTURES
t (1) BORROW FCA . rF,ASK (4) LONG FOREIGN
(2) EXCHANGE FOR CURRENCY FORWARD
ASBID ($/FC)
(3) INVEST IN T-BILLS
FOR rD,BID FOR FASK($/FC)
T REDEEM THE T-BILLS TAKE DELIVERY TO CLOSE
EARN THE LONG POSITION
PAY BACK THE LOAN RECEIVE
in foreign currency.
IN THE ABSENCE OF ARBITRAGE:
t)-(TrBID
BIDD,($/FC)eAS
($/FC)F
($/FC)eAS
ASK
t)-T(rBID
BIDD,
t)-(Tr ASKF,Ae
t)-T)(r(rBIDASK
ASKF,BIDD,($/FC)eS ($/FC)F
t)-(TrBID
BIDD,($/FC)eAS
t)-(Tr ASKF,Ae
($/FC)F
($/FC)eAS
ASK
t)-T(rBID
BIDD,
19
t)-T)(r(rBIDASK
ASKF,BIDD,($/FC)eS ($/FC)F
t)-)(Tr - (rASK
BIDF,ASKD,($/FC)eS
IN SUMMARY: INEQUALITY 1:
($/FC)FBID
INEQUALITY 2:
NOTICE THAT: RHS(1) > RHS(2)
RHS(2) RHS(1) . .
FBID FASK
FASK($/FC) > FBID($/FC).
CONCLUSION: ARBITRAGE EXISTS ONLY WHEN BOTH FUTURES PRICES ARE ABOVE
RHS(1) OR BOTH ARE BELOW RHS(2)
20
EXAMPLE:
The following are market prices on a given day:
S($/NZ) F($/NZ) R(NZ) R(US) ASK $0.4438 $0.4480 6.000% 10.8125% BID $0.4428 $0.4450 5.875% 10.6875%
Clearly, F(ask) > F(bid).
What remains to be checked is whether the inequalities are
satisfied or not.
21
t)-T)(r(rBIDASK
ASKF,BIDD,($/FC)eS ($/FC)F
t)-)(Tr - (rASK
BIDF,ASKD,($/FC)eS
EXAMPLE: INEQUALITY 1:
($/FC)FBID
.4450 < (.4438)e(.108125 - .05875)/12 = .4456
RHS(2)=.4445 RHS(1)=.4456 . . . .
FBID = .4450 FASK=.4480
.4480 > (.4428)e(.106875 - .06000)/12 = .4445
NO ARBITRAGE OPPORTUNITY EXISTS.
INEQUALITY 2:
22
EXAMPLE:
The following are market prices on a given day:
S($/NZ) F($/NZ) R(NZ) R(US) ASK $0.4431 $0.4480 6.000% 10.7025% BID $0.4428 $0.4450 5.888% 10.6875%
Clearly, F(ask) > F(bid).
What remains to be checked is whether the inequalities are
satisfied or not.
23
t)-T)(r(rBIDASK
ASKF,BIDD,($/FC)eS ($/FC)F
t)-)(Tr - (rASK
BIDF,ASKD,($/FC)eS
EXAMPLE: INEQUALITY 1:
($/FC)FBID
.4450 < (.4431)e(.107025 - .05888)/12 = .4449
RHS(2)=.4445 RHS(1)=.4449 . . .
FBID = .4450 FASK=.4480
.4480 > (.4428)e(.106875 - .06000)/12 = .4445
ARBITRAGE OPPORTUNITY EXISTS.
INEQUALITY 2:
24
FOREIGN CURRENCY CONTRACT SPECIFICATIONS
CURRENCY SIZE MIN. MIN.F.
CHANGE CHANGE
JAPAN YEN 12.5M .000001 $12.50
CAN. DOLLAR 100,000 .0001 $10.00
BRITISH POUND 62,500 .0002 $12.50
SWISS FRANC 125,000 .0001 $12.50
AUSTRALIAN DOLLAR 100,000 .0001 $10.00
MEXIAN PESO 500,000 .000025 $12.50
BRAZILIAN REAL 100,000 .0001 $10.00
EURO FX 125,000 .0001 $12.50
* THERE ARE NO DAILY PRICE LIMITS
* CONTRACT MONTHS FOR ALL CURRENCIES:
MARCH, JUNE, SEPTEMBER, DECEMBER
LAST TRADING DAY: FUTURES TRADING TERMINATES AT 9:16 AM ON THE SECOND BUSINESS DAY IMMEDIATELY PRECEEDING THE THIRD WEDNESDAY OF THE CONTRACT MONTH.
DELIVERY BY WIRED TRASFER. 3RD WEDNESDAY OF CONTRACT MONTH
25
SPECULATION: TAKE RISK FOR EXPECTED PROFIT
AN OUTRIGHT NAKED POSITION
k - MARCH 1. S($/CD) = .6345 <=> S(CD/$) = 1.5760
t- SEPTEMBER F($/CD) = .6270 <=> F(CD/$) = 1.5949
SPECULATOR: “THE CD WILL NOT DEPRECIATE TO THE
EXTENT IMPLIED BY THE SEP. FUTURES.
INSTEAD, IT WILL DEPRECIATE TO A PRICE
HIGHER THAN $.6270/CD.”
TIME CASH FUTURES
MAR 1 DO NOTHING LONG N, CD FUTURES
AT $.6270/CD
AUG 20 DO NOTHING SHORT N, CD FUTURES
AT $.6300/CD
PROFIT = ($.6300/CD - $.6270/CD)(CD100,000)(N) = $300(N).
26
INTERCURRENCY FUTURES SPREAD
A FUTURES CROSS-CURRENCY SPREAD IS THE PURCHASE OF ONE CURRENCY FUTURES AND THE SIMULTANEOUS SALE OF
ANOTHER CURRENCY FUTURES; BOTH FUTURES ARE FOR THE SAME DELIVERY MONTH.
A POSITION TRADER OBSERVES THE FOLLOWING RATES:
CROSS RATES
MARCH 1: $1.7225/BP $.6369/CHF BP.3698/CHF
JUNE Fs $1.7076/BP $.6448/CHF BP.3776/CHF
(Currently: 1BP = 2.7042CHF. JUN Fs: 1BP = 2.6483CHF)
SPECULATOR: “THE BRITISH POUND WILL DEPRECIATE
RELATIVE TO THE SWISS FRANK BY LESS THAN WHAT IS EXPECTED ACCORDING TO THE JUNE FUTURES CROSS RATE. IN FACT, I BELIEVE THAT THE BRITISH POUND WILL APPRECIATE AGAINST THE SWISS FRANC BETWEEN NOW AND THE END OF MAY TO AROUND BP.3600/CHF OR, BP2,7778/CHF.”
IN OTHER WORDS, THE SPREAD $1.7076/BP - $.6448/CHF = $1.0628 WILL INCREASE!!!!
BUY THIS SPREAD!
LONG THE BP JUNE FUTURES AND SIMULTANEOUSLY,
SHORT THE SF JUNE FUTURES
27
TIME CASH FUTURES
MAR 1 DO NOTHING SHORT 1 JUNE CHF FUTURES FOR $.6448/CHF
SF Fs = 125,000CHF LONG 2 JUNE BP BP Fs = 62,5000BP FUTURES FOR $1.7076/BP
SPREAD COST = $1.7076 - $.6448 = $1.0628
MAY 20 DO NOTHING CLOSE YOUR SPREAD:
LONG 1 JUNE CHF FUTURES FOR $.630/CHF
SHORT 2 JUNE BP FUTURES FOR $1.730/BP
SPREAD REVENUE = $1.730 - $.6300 = $1.1000
PROFIT = ($1.1000 - $1.0628)(125,000) = $4,650/CONTRACT
NOTICE THAT THE BP HAS APPRECIATED
FROM BP.3698/CHF ( 1BP = 2.7042CHF) IN MARCH TO
$.6300/CHF/$1.730/BP = BP.3642/CHF (1BP = 2.7457CHF) IN JUNE
28
BORROWING U.S. DOLLARS SYNTHETICALLY ABROAD
OR
HOW TO BEAT THE DOMESTIC BORROWING RATE – A CASE OF QUASI-ARBITRAGE
A FIRM NEEDS TO BORROW $200M FROM MAY 25,2001 TO DECEMBER 20, 2001, FACES THE FOLLOWING DATA:
SPOT: BID $.4960/NZ NZ2.0125/$
ASK $.4968/NZ NZ2.0161/$
DEC. FUTURES BID $.5024/NZ NZ1.9889/$
ASK $.5028/NZ NZ1.9904/$
INTERST RATE BID ASK
r(NZ) 6.75% 6.8634% (365-DAY YEAR)
r(USA) 8.50% 9.90% (360-DAY YEAR)
29
IN THE SPIRIT OF
REVERSE CASH-AND-CARRYTIME CASH FUTURES
MAY 25 (1) BORROW NZ403,220,000 LONG 3,355 DEC. NZ
AT AN ANNUAL RATE OF FUTURES FOR F = .5028
6.8634% FOR 209 DAYS
(2) EXCHANGE THE
NZ403,220,000 INTO
LOAN VALUE ON DEC. 20
403,220,000e(.068634)209/365 = NZ419,382,000
DEC 20 TAKE DELIVERY OF
NZ419,382,000 BY PAYING
REPAY THE LOAN $419,382,000(.5028)
= $210,865,000 comparedwith:
THE IMPLIED REVERSE REPO RATE
FOR 209 DAYS =
3,355 = 125,000
0419,382,00N
403,220,000
2.061 = $200M
9.24%.or
.0924 = ]0200,000,00
0210,865,00ln[
209
365
58$211,831,7 00e$200,000,0 360
209(.099)
30
EXAMPLES OF FOREIGN CURRENCY
LONG HEDGES
EXAMPLE 1.ON JULY 1, AN AMERICAN AUTOMOBIL DEALER ENTERS INTO A CONTRACT TO IMPORT 100 BRITISH SPORT CARS FOR BP28,000 EACH. PAYMENT AND DELIVERY WILL BE MADE IN BRITISH POUNDS ON NOVEMBER 1.
RISK EXPOSURE: IF THE BP APPRECIATES RELATIVE TO THE $ THE IMPORTER’S COST WILL RISE.
TIME CASH FUTURES
JUL. 1 S($/BP) = 1.3060 BUY 46 DEC BP FUTURES
CURRENT COST = $3,656,800 FOR F = $1.2780/BP
DO NOTHING
NOV. 1 S($/BP) = 1.4420 SELL 46 DEC BP FUTURES
COST = 28,000(1.4420) FOR F = $1.4375/BP
= $40,376/CAR, OR PROFIT
$4,037,600 FOR THE (1.4375 - 1.2780)62,500(46)
100 CARS = $458,562.50
ACTUAL COST = $3,579,037.50
N = 3,656,800
62,500(1.2780) = 46
31
A LONG HEDGE
EXAMPLE 2.ON MARCH 1, AN AMERICAN WATCH RETAILER AGREES TO PURCHASE 10,000 SWISS WATCHES FOR CHF375 EACH. THE SHIPMENT AND THE PURCHASE WILL TAKE PLACE ON
AUGUST 26.
TIME CASH FUTURES
MAR. 1 S($/CHF) = .6369 LONG 30 SEP CHF FUTURES
CURRENT COST 10,000 (375)(.6369) F(SEP) = $.6514/CHF
= $2,388,375 CONTRACT = (.6514)125,000
DO NOTHING = $81,425.
AUG. 25 S=$.6600/CHF SHORT 30 SEP CHF FUTURES
WATCHES FOR F(SEP) = $.6750/CHF
BUY 10,000 WATCHES PROFIT:
AT 375(.6600) = $247.50/WATCH (.6750 - .6514)125,000(30)
TOTAL $2,475,000. = $88,500.
ACTUAL COST $2,386,500
N = 2,388,375
81,425 = 30
32
LONG HEDGE: PROTECT AGAINST DEPRECIATING DOLLAR
EXAMPLE 3.
AN AMERICAN FIRM AGREES TO BUY 100,000 MOTORCYCLES FROM A JAPANESE FIRM FOR ¥202,350 .
CURRENT PRICE DATA:
SPOT: S(ask) = $.007020/ ¥ ¥ 142.30/$
S(bid) = $.007027/ ¥ ¥ 142.45/$
DEC FUTURES: F(ask) = $.007190/ ¥ ¥ 139.08/$
F(bid) = $.007185/ ¥ ¥ 139.19/$
ON DECEMBER 20 THE FIRM NEEDS ¥ 20,235,000,000
THIS SUM IS 20,235,000,000(.007027) =
= $142,191,345 IF PURCHESED TODAY.
N = $142,191,345/(¥ 12,500,000)($.007190/JY) = 1,582.
33
TIME CASH FUTURES
MAY 23 DO NOTHING LONG 1,582 JY FUTURES FOR
CURRENT VALUE = $142,191,345 F(ask) = $.007190/ ¥
CASE I:
DEC 20 S = $.0080/ ¥ SHORT 1,582JY Fs. BUY MOTORCYCLES
FOR $.0080/ ¥
FOR $161,880,000
PROFIT:(.0080-.00719)12,500,000(1,582)
= $16,017,750
NET COST: $161,880,000 - $16,017,750 = $145,862,250.
CASE II:
DEC 20 S = $.0065/ ¥ SHORT 1,582 JY Fs.
PURFHASE PRICE
FOR $.0065/ ¥
$131,527,500
LOSS: (.00719-.0065)12,500,000(1,582)
= $13,644,750
NET COST: $145,172,250.
34
A SHORT HEDGEA U.S. BASED MULTINATIONAL COMPANY’S MEXICAN SUBSIDIARY WILL GENERATE EARNINGS OF MP100M AT THE END OF THE QUARTER - MARCH 31. THE MONEY WILL BE DEPOSITED IN THE NEW YORK BANK ACCOUNT OF THE FIRM IN U.S. DOLLARS.
RISK EXPOSURE: IF THE DOLLAR APRECIATES RELATIVE TO THE MEXICAN PESO THERE WILL BE LESS DOLLARS TO DEPOSIT.
TIME CASH FUTURES
FEB. 21 S($/MP) = .I000 F(JUN) = $.1250/DM
CURRENT SPOT VALUE F = 500,000($.1250MP) = $62,500
= $10M.
DO NOTHING
SHORT 160 JUN MP FUTURES
MAR 31 S($/MP) = .0925 LONG 160 JUN MP FUTURES
DEPOSIT F(JUN) = $.1165/DM
100,000,000(.0925) PROFIT:
= $9,250,000 (.1250 - .1165)500,000(160)
= $680,000
TOTAL AMOUNT TO DEPOSIT $9,930,000
160 = 62,500
10,000,000 =N