This document discusses currency futures and forward contracts. It defines a futures contract as an agreement to buy or sell a specified amount of currency at a predetermined exchange rate at a future date. Forward contracts are similar over-the-counter agreements without standardization. Both can be used for hedging currency risk from future cash flows or speculating on currency movements. The document outlines key features and uses of futures and forward contracts for corporations and investors.

1. CurrencyCurrency
Futures andFutures and
ForwardsForwards
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2. OutlineOutline
• Meaning of Futures
• Features of Futures Contracts
• Using Futures for Hedging and
Speculation
• Meaning of Forwards
• Features of Forward Contracts
• Using Forwards for Hedging and
Speculation
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3. Futures ContractsFutures Contracts
• A futures contract is an agreement to buy
or sell a specified quantity of a specified
asset at a certain point in the future at a
price agreed upon today
• In the case of currencies, it is an
agreement to buy/sell a specified quantity
of a specific currency at a pre agreed upon
exchange rate at a certain time in the
future
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4. Currency FuturesCurrency Futures
• Trade on an organized exchange
• Futures contracts are standardized with
regard to the following
– The asset on which you trade a futures
contract
– The contract size
– Delivery arrangements
• Daily price movement limits-limit up and
limit down
• Position limits
• Mark to Market on a daily basis
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5. Corporate Use of CurrencyCorporate Use of Currency
FuturesFutures
• Hedge open positions in foreign currencies
by buying/selling currency futures
• Foreign currency cash inflows
– Risk: domestic currency may appreciate
– Strategy: sell foreign currency in the futures
market at the futures exchange rate (Short)
• Foreign currency cash outflows
– Risk: domestic currency may depreciate
– Strategy: buy foreign currency in the futures
market at the futures exchange rate (Long)
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6. Forward ContractsForward Contracts
• Agreement to buy or sell an asset at a
certain time in the future for a
predetermined price
• Over-the-counter product that do not
trade on any organized exchange
• Delivery date can be any date that is
mutually convenient to both the parties to
the contract
• Size can be customized
• Not marked-to-market daily
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7. Hedging and SpeculationHedging and Speculation
using Forwardsusing Forwards
• Expect a currency to appreciate
– Buy that currency forward (Long Position)
• Expect a currency to depreciate
– Sell that currency forward (Sell Position)
• Profit/Loss in a long position:
ST – K
• Profit/Loss in a short position:
K – ST
Where ST is the spot exchange rate at maturity and
K is the forward exchange rate at which you
buy/sell a currency forward.
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