CHAPTER 7 FUTURES AND OPTIONS ON FOREIGN EXCHANGE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Explain the basic differences between the operation of a currency forward market and a futures market. Answer: The forward market is an OTC market where the forward contract for purchase or sale of You can trade most futures electronically almost 24 hours a day. You can trade most equity futures both through your broker at the usual New York Stock Exchange trading times and through the Chicago Board of Trade's extended Global Trading hours. Each futures group, such as agriculture or energy, equity options data. futures. indexes. forex. prices per exchange (all symbols), starts at $10-$25 for 5 years daily data. intraday data starts at $5 per exchange (all symbols) for one month. Historical prices (daily) and other data: futures. futures options. indexes & cash markets. forex. US equities & options. mutual funds. interest rates & economic data. COT reports Describe the trader's cash flows if the option is held until September and the stock price is $25 at that time. The trader receives an inflow of $2 in May. Since the option is exercised, the trader also has an outflow of $5 in September. The $2 is the cash received from the sale of the option.
Quarterly months: The maturity month of the underlying futures contract and the expiration month of the option are identical. Last trading day. Last trading day is the
Treasury Bond Futures and the Quality Option The seller has the option to deliver any bond with at least 15 years to call or maturity. Each deliverable bond has a publicized conversion factor equal to the price of $1 par of the bond at a yield of 6%. If the seller delivers a given bond, he receives the futures price, times the conversion factor, plus accrued interest. More complex models might account for the end-of-month option, which is really another switch option (as opposed to being a timing option). Remember that futures price stops changing after the last trade date, but cash bond prices still do. Bond futures are contracts that entitle the contract holder to purchase a bond on a specified date at a price determined today. A bond future can be bought on a futures exchange based on a variety 2) Once you have a grid of bond deliverable prices, you can price the bond futures contract using backward induction. If you ignore the end-of-month option (bond futures expire one week before the last delivery date) and timing option (bonds can be delivered any time between the first delivery date and the last delivery ate), you could assume that delivery happens on the last delivery date. best timing to buy the bond at the cheapest price. Lastly the end of the month option refers to the fact that the short can wait until the last day of the trading month to decide whether to deliver or not while the last trading day is 7 business day prior to the end of the month for the T-bond and 2 business day for the Bund futures contract. Coupon expiration month –Wildcard option: The futures exchange closes early in the afternoon, but bonds keep trading. The seller can annouce delivery any time until bond markets close. –End-of-month option: The futures stop trading 8 business days before the end of the month. The delivery options reduce the equilibrium futures price.
The location option allows delivery at various locations (Pirrong et al.). The wild card and end-of-the month options, present in the T-bond futures, give added
The end-of-month option refers to the deliveries occurring at the last 7 business days in the delivery month when the futures market is closed to trading. For the But, the outlook for Treasury bond futures contracts is bleak, as the End of month option: futures cease trading 8 business days before the end of the delivery The end of month option has a brief life of just a handful of days which limits its value in practice. In addition, cheapening of the non-CTD bonds in the basket is The location option allows delivery at various locations (Pirrong et al.). The wild card and end-of-the month options, present in the T-bond futures, give added