Студопедия — Fixed and option contracts
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Fixed and option contracts






A forward exchange contract may be either fixed or option. Fixed means that performance of the contract will take place on a specified date in the future. For example, a two months forward fixed contract taken out on 1 September will require performance on l November, i.e. two months later. Option means that performance of the contract may take place, at the option of the customer, either at any date from the contract being made up to and including a specified final date for performance or at any date between two specified dates, both in the future.

Option contracts are forward exchange contracts where the customer has the option to call for performance of the contract either at any date from the contract being made up to a specified date in the future or at any date between two dates both in the future.

Option contracts are normally used to cover whole months straddling the likely payment date, where the customer is not sure of the exact date on which he will want to buy or sell currency. The purpose of an option contract is to avoid having to renew a forward exchange contract and extend it by a few days, because extending a forward contract can be rather expensive in terms of cost per day. By using option contracts, the customer is therefore able to cover his foreign exchange risk with certainty even when he is uncertain exactly about the date.

For example, suppose that now is 10 April, and a customer of your bank knows that he must make a payment of CHF 40,000 at some time before the end of May. He could take out an option on forward contract for the bank to sell him the CHF 40,000 at any time in the period, say, 10 April - 10 June, with the forward exchange contract therefore covering any time in the next 2 month period.

When a customer makes an option forward exchange contract with his bank, it is necessary to establish the buying or selling rate which the bank will quote. The bank will quote the rate which is most favorable to itself at any date within the option period. This makes sense, because the customer has the option to call for performance of the contract on any date within the period, and the bank should make sure that the customer does not obtain a favorable rate at the bank’s expense.

A forward exchange contract will provide cover against exchange risks for the period between making the contract and the date of performance of the contract. Forward cover is available for up to five years ahead, or even longer, but typically, selling and buying rates are quoted for one, two, three, six or twelve months.

The forward rates shown daily in the Financial Times (for both sterling and the US dollar) are the one month and three month forward rates. Contracts up to one month are also available but are less common. These are called short (value dates) contracts.

 

1. Answer the questions:

 

1. What is a forward exchange contract?

2. In what way is a forward exchange contract binding?

3. What will happen if the customer cannot meet the terms of the

contract? Why are the terms of the contract so rigid?

4. Who makes money by entering the contract?

5. What are the types of a forward exchange contract? What are the

differences between them?

6. Which of the two types of the contract is more risky for the bank?

For the customer?

7. Why does the customer try to avoid having to renew a forward

exchange contract?

8. How can the customer cover his risk?

9. How does the bank try to gain from an option exercise contract?

10. For what term is forward cover available?

11. In what situation will the customer enter into five-year forward

exchange contract?

12. What is the usual term of the contract? Why?

 

2. Match each of the words on the left with the correct explanation on the right:

1. market price a. the right to buy a fixed quantity of a commodity, security or currency at a certain price on a certain future date
2. in-the-money b. the price at which the holder may buy or sell the underlying security
3. hedging c. the call option with an exercise price below the underlying share’s current market price
4. futures contract d. the price of a share quoted at any given time on the stock exchange; the current price of a commodity
5. call option e. an agreement to buy or sell commodity or currency or financial instrument
6. swap f. buying or selling currency for immediate delivery
7. market price g. the price of a share quoted at any given time on the stock exchange
8. OTC h. granting the owner the right to sell a security
9. spot i. buying or selling currency spot and simultaneous selling or buying it forward
10.put option j. markets in unlisted shares operated by specialist institutions or merchant banks
11.exercise price k. reducing the risk of unfavourable movement in commodity or security price, or exchange or interest rates, by way of futures contract  

3. Complete the text using these words:

currency, forward rate, to gain, to hold on, interest, interest differential, to lose, to pay, spot rate

 

It is important to understand that a forward rate is not the best estimate of what the......(1) will be in the future. It will be purely coincidental if the three month forward rate on, say, 1 June (the rate at which the bank contracts now to deal on 1 September) is the same as the spot rate on l September. The......(2) is determined by taking the spot rate ruling on the day the forward exchange contract is made and adding or subtracting an......(3) for the period of the contract.

This is easier to understand with an example. Suppose you have imported goods from Germany for which you have to pay in three months’ time. You think that the value of the Deutschemark will rise over the period so that you will have to pay more in sterling terms in three months’ time than you would if you......(4) now. However, if you buy Deutschemarks now, you will lose interest on the sterling you could otherwise have deposited for that three months - whereas the bank gains that interest. On the other hand, you gain interest on your Deutschemarks.

Again, if you enter into a forward exchange contract now to buy Deutschemarks at a fixed rate of exchange in three months time, then you......(5) the interest on sterling but......(6) the chance of gaining interest on Deutschemarks.

The interest rate in Germany is likely to be lower than in the UK because its......(7) is stronger. Therefore, if you buy forward rather than spot you will pay more for your Deutschemarks to reflect the higher interest you receive over the three months on your sterling - and which the bank necessarily loses because it has to pay you......(8) instead of getting interest itself on the sterling you would have paid it. The bank will still get interest on its Deutschemark holdings but not enough to make up the difference.

If, however, the Deutschemark was weakening and German interest rates went above UK rates to encourage people to......(9) to Deutschemarks, then the bank would charge you more for your Deutschemarks spot to reflect its lost opportunity to hold Deutschemarks at a high interest rate.

 

4. Speak on:

1. Forward exchange contracts.

2. Foreign currency options.

3. Financial futures and swaps.

4. Advantages and disadvantages of different methods of hedging.

5. The ways an international company tries to minimize its exchange risks.

5. Make written translation of the text into Russian:

When looking at ordinary forward contracts we soon appreciate that a customer’s only option is the time of delivery and not the delivery itself. A forward contract is a firm and binding contract between the bank and its customer. Customers demand flexibility and for many years some bank customers complained that the ordinary forward contract usually meant that they lost money in the event of a close-out, due to their inability to comply with the terms of the forward contract. Further, they can see no reason why, when taking out a forward option contract, they should not be able to «walk away» from that option just as they can walk away from stock options. This feeling was extremely strong if their failure to comply with the terms of the forward option contract was due to a breakdown in the terms of the underlying commercial contract. Additionally, when honouring the terms of the contract, customers felt aggrieved if they were unable to take advantage of current movements in exchange rates, which might have been in their favour if a forward contract had not been in operation. The word «option» in this context was therefore something of a misnomer, in that it really meant that the delivery date, as far as the exchange of currencies was concerned, was variable as opposed to that which obtained on a fixed date contract.

In order to meet their customers’ needs for greater flexibility, banks have developed a contract during the 1980s which complies exactly with the customers’ wishes. In very simple terms, a foreign currency option is a means by which a customer can arrange with the bank to buy or sell a specific currency at a fixed price (the strike price) either at any time in a given period or on a fixed future date, should the customer so desire. The customer, therefore, has no obligation to fulfil the contract if the customer, who may be a buyer or seller, decides to exercise his option. The customer now has the opportunity to purchase a pure or true foreign currency option. What happens is that the customer will have to pay a premium, usually at the time when the contract is taken out, for the privilege of obtaining some form of foreign exchange cover. One could liken the premium to that which a person might pay to an insurance company to cover himself in the event of a serious accident taking place. The insured would only claim in the event of the accident actually happening and the foreign currency option concept is very similar

 

6. Translate the text into English:

 

Курсы большинства валют даются за два предыдущих торговых дня и представлены обычно двумя способами; как число долларов, необходимых для приобретения одной единицы иностранной валюты, и как число единиц иностранной валюты, необходимое для приобретения одного доллара США. Например, в среду, 29 января 2009 года, курс английского фунта стерлингов составлял 1,5380 доллара США за один фунт, или, что равносильно, 0,6502 фунта стерлингов за один доллар США.

Для большинства валют приводится только один курс — обменный курс по кассовым операциям. Он применим для торговых сделок, которые будут заключены в период не более 48 часов. Кроме того, для обширного числа иностранных валют приводятся также и обменные курсы по срочным операциям. Срочная сделка — это контракт между банком и его клиентом, по которому доллары будут обменены на нужную валюту в какой-либо определенный день в будущем по курсу, определенному сегодня.

Предположим, что 29 января 2009 года некая американская фирма заказывает английских кукол и медведей на миллион фунтов стерлингов. Контракт предусматривает оплату через 90 дней после получения заказа. Фирма-заказчик может сразу же купить английские фунты стерлингов по обменному курсу по кассовым сделкам, заплатив на 1 млн. фунтов стерлингов 1 538 000 долларов. Или эта фирма может предпо­честь приобрести фунты в результате срочной операции. Это будет означать, что фирма подпишет с коммерческим банком контракт, в котором будет оговорено, что она заплатит 1519 500 долларов за тот же самый миллион фунтов стерлингов через 90 дней.

Разница в исчислении обменных курсов по кассовым операциям и обменных курсов по срочным операциям в любой выбранный момент времени отражает существующую разницу между рыночными нормами процента в сравниваемых странах. В нашем случае факт того, что обменный курс по срочным операциям для фунта стерлингов меньше обменного курса по кассовым операциям, отра­жает то обстоятельство, что в рассматриваемый период времени английские рыночные нормы процента в среднем выше американских в расчете по сопо­ставимым ценным бумагам. Поскольку английские нормы процента выше, в равенстве этих курсов заложено потенциальное преимущество: сегодня полу­ченные фунты стерлингов возможно вложить в Лондоне по более высокой процентной ставке, спокойно ожидая, когда придет срочный платеж за кукол и медведей. Поэтому курс фунта стерлингов по срочным операциям должен быть пропорционально ниже, дабы компенсировать это преимущество. Аме­риканская фирма может также вложить свои денежные средства в Нью-Йорке по более низкой процентной ставке до того момента, когда состоится контракт.

 

UNIT 7







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