The ACE Forward Option Future Fixed

8/10/2019 The ACE Forward Option Future Fixed

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Future, Forward, and Option Hedg


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Agenda

Question 1: Future Hedging

Question 2: Option Hedging

Question 3: Forward Hedging


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Agenda





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Question 1 Future Hedging

Input Process Outpu

Control


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Future HedgingCurrent Condition Implementation

GrossNet

BenefitConsequences

Input OutProcess

Control

Question 1 Future Hedging


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Future Hedging - InputJamie Rodriguez, a currency trader for Chicago-based Ventosa Investments, usefollowing futures quotes on the British pound () to speculate on the value of th

a. If Jamie buys 5 June pound futures, and the spot rate at maturity is $1.3the value of her position?b. If Jamie sells 12 March pound futures, and the spot rate at maturity is $is the value of her position?c. If Jamie buys 3 March pound futures, and the spot rate at maturity is $is the value of her position?d. If Jamie sells 12 June pound futures, and the spot rate at maturity is $

is the value of her position?

Maturity

MarchJune

Settle O

1.42281.4162

British Pound Futures, US$/pound(CME)

Contract pounds


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Future Hedging - Input

standardized contract between two parties to buy or sell a specifiedasset of standardized quantity and quality for a price agreed upon

today with delivery and payment occurring at a specified future delivedate

Standardized contract size and delivery dateDaily settlements in market places

Mostly settled by offset

Future Contracts


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Future Hedging - Processa. If Jamie buys 5 June pound futures, and the spot rate at maturity is $1.3the value of her position?

Date Spot Market Future Market

Now Not Available $ 1.4162 /

June $ 1.3980 / $ 1.4162 /

$ 1.3980$ 1.4162 _($ 0.0182) /

(0.0182) x 62,500 = ($ 1,137.5)

Loss for 5 Cont$ 5,687.


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d


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March $ 1.4560 / $ 1.4228 /

$ 1.4560$ 1.4228 _$ 0.0332 /

0.0332 x 62,500 = $ 2,075

Profit for 3 Cont$ 6,225

c. If Jamie buys 3 March pound futures, and the spot rate at maturity is $is the value of her position?

Future Hedging - Process

d i


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d. If Jamie sells 12 June pound futures, and the spot rate at maturity is $is the value of her position?



March $ 1.3980 / $ 1.4162 /

$ 1.4162$ 1.3980 _$ 0.0182 /

0.0182 x 62,500 = $ 1,137.5

Profit for 12 Cont$ 13,650

Future Hedging - Process

F H d i O


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Date Contracts Spot Market

June Buys 5 $ 1.4162 /

March

$ 1.3980 /

$ 1.4162 /

Future Hedging - Output

FutureMarket

P

March

June

Buys 3

Sells 12

Sells 12

$ 1.4560 /

$ 1.4560 /

$ 1.3980 /

$ 1.4228 /

$ 1.4228 /

Loss

Los

Pro

Pro

Value of Jamies Position

F H d i C l


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Future Hedging - Control

Benefits Consequences

Standardize (contract size, d

date, etc.)

Legal obligation to futhe contract

The obligation can be removed

before the expiry of the contract bymaking an opposite transaction

Pay the initial

Tradable (actively traded in themarket)

A d


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Agenda




Q i 2 O i M k


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Question 2 Option Market

Input Process Outpu

Control

Q i 2 O i M k


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Question 2 Option Market

Option HedgingCurrent Condition Implementation

GrossNet

BenefitConsequences

Input OutProcess

Control

O ti M k t I t


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Option Market - Input

CallOption Gives the buyer the right to buy aspecified currency at a specified

exchange rate, at or before a specifieddate

Gives the buyer the right to sell aspecified currency at a specified

exchange rate, at or before a specified

date

O ti M k t I t


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In the money if exchange rate < strikeprice

At the money if exchange rate = strikepriceOut of the money if exchange rate > strikepriceIn the money if exchange rate > strike

price At the money if exchange rate = strikepriceOut of the money if exchange rate < strikeprice

CallOption

O ti M k t I t


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Option

Put on SGD

Call on SGD

Strike Price P

$0.65/S$

$0.65/S$ $0

$

Sallie Schnudel trades currencies for Keystone Funds in Jakarta. She fonearly all of her time and attention on the USD / SGD cross rate. Thrate is $0.6000/S$ . After considerable study, she has concluded that the Si

dollar will appreciate versus the US dollar in the

a. Should Sallie buy a put on Singapore dollars or a call on Singapore dollab. What is Sallies breakeven price on the option purchased in part (a)?c. Using your answer from part (a), what is Sallies gross profit a

(including premium) if the spot rate at the end of 90 days is indeed $0.70d. Using your answer from part (a), what is Sallies gross profit a

(including premium) if the spot rate at the end of 90 days is indeed $0.80

O ti M k t I t


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Option Market - Inputa. Should Sallie buy a put on Singapore dollars or a call on Singapore

0

-0.00003

0.65

Spot Rate Strike PricPremium

Out of themoney

In themoney

Option Market Process


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Option Market - Processa. Should Sallie buy a put on Singapore dollars or a call on Singapore

0

-0.00046

0.65


Sallie should buyif Singapore doll

appreciate in t

Out of themoney

In themoney

Option Market Process


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Option Market - Processb. What is Sallies breakeven price on the option purchased in part (a)?

0

-0.00046

0.650460.65


Out of themoney

In themoney BEP=

Option Market Output


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Option Market - Outputc. Using your answer from part (a), what is Sallies gross profit and net pr

(including premium) if the spot rate at the end of 90 days is ind$0.7000/S$?

0

-0.00046

0.650460.65

Spot Rate Strike PricPremium Gross P

0.7000 0.65=

Net Pr

0.7000 0.60.049

Out of themoney

In themoney

Option Market Output


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Option Market - Outputd. Using your answer from part (a), what is Sallies gross profit and net pr

(including premium) if the spot rate at the end of 90 days is ind$0.8000/S$?

0

-0.00046

0.650460.65

Spot Rate Strike PricPremium Gross P

0.8000 0.65=

Net Pr

0.8000 0.60.149

Out of themoney

In themoney

Option Market Control


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Option Market - Control

Benefit Consequences

Limited downside risk

Flexibility & variety of strategy

More expensiv

Risk of unhedge

Potentially provide significantcash flow relief

Has the right butnot the obligation

http://www.lariba.com/knowledge-center/articles/pdf/Malaysia%20-%20GOLD%20-%20Hedging%20

Agenda


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Agenda

Question 1: Future HedgingQuestion 2: Option Hedging


Question 3: Theory FX Forwards


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Question 3: Theory FX Forwards

Forward FX Outright Agreement

An agreement between two parties to exchange two currencies fosettlement on a fixed future date.

Premium = Forward Rate > Spot Rate

Discount = Forward Rate < Spot Rate



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Christoph Hoffeman trades currency for Blade Capital of Geneva

Christoph has $10 million to begin with, and he must state all profit

the end of any speculation in US dollars.

The spot rate on the euro is $1.3358/

Case 3 Question

Question A: Euro Appreciate


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IfChristoph Hoffeman believes the euro will continue r i se in va lue against the US dollar, so that he expects t

spot rate to be $1.3600/ at the end of 30 days,

what should he do?

Question B: Euro Depreciate


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IfChristoph Hoffeman believes the euro will continuedecr ease in value against the US dollar, so that h

expects the spot rate to be $1.2800/ at the end days, what should he do?

Question 3 Forward Hedging


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Input Process Outpu

Control



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Forward HedgingCurrent Condition Implementation

GrossNet

BenefitConsequences

Input OutProcess

Control






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Forward rate = 1.3358 + . 2

+ . = $1.3360/

How to calculate FX forward rate

http://www.global-rates.com/interest-rates/central-banks/central-bank-america/fed-in

Given condition:Spot rate: $1.3358/ US-interest rate: 0.25% annumEuro-interest rate: 0.05% annum

Forward Hedging - Input


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Spot Rate = $1.3358/ 0.7486

Forward rate = $1.3360/ 0.7485Expected SR = $1.3600/ 0.735(A)

$1.2800/ 0.7812(B)

Forward Hedging Current Condition



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Forward Hedging Input

Hedging No Hedging

Now Sell $ forward @ 0.7485/$

30-dayslater Deliver $ and receive $10 million * 0.7485/$ = 7,485,000

Deliver $ and recei$10 million * 0.73 7,353,000

The $ end up worth 7,485,000 - 7,353,000 = 132,higher

Question A: Euro Appreciate @ $1.

Decision: Mr. Christoph Hoffeman should Hedge



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Hedging No Hedging

Now Sell $ forward @ 0.7485/$

30-dayslater Deliver $ and receive $10 million * 0.7485/$ = 7,485,000

Deliver $ and recei$10 million * 0.73 7,812,500

Question B: Euro Depreciate @ $1.

The $ end up worth 7,812,500 - 7,485,000 = 327,higher

Decision: Mr. Christoph Hoffeman should not Hedge



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372,500 * $1.2800 = $419,200

132,000 * $1.3360 = $176,352

Profit in terms of $

Question A

Question B

Forward Hedging - Control


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Forward Hedging Control

Benefits Consequences

No premium or payment upfront

Mitigate risk of currency volatility

Securing value of your asset

Loss opportunity to make

BenefitConsequenc

es

Gross ProfitNet Profit


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Future, Forward, and Option Hedg

Documents

The ACE Forward Option Future Fixed