Mechanics of

Futures
Markets
IE 440/IE 540
• • •
Introduction to Financial Engineering
Background

Specifications
Mechanics of Futures Markets
CME Group
Instructor: Savaş Dayanık
VOB

Futures&Spot

Margin

Comparison

Problems

Review

C J I B

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February 17, 2011

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Mechanics of
Futures
Markets
1. Background
• • • • Futures contract is an agreement to buy or sell an asset
Background
at a certain future time at a certain price.
Specifications

• Buyer has long position, and seller has short position in

CME Group

the futures contract.

VOB

Futures&Spot • The majority of futures contracts do not lead to delivery.

Margin Most traders close out their positions by entering into an
Comparison opposite trade before the delivery date.

Problems
• Futures contracts are traded on exchanges. The futures
Review prices are determined by demand and supply.

C J I B CME Group • Euronext • Eurex

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Vadeli İşlem ve Opsiyon Borsası (VOB)

Go Back • Specifications needed on what can be delivered, where it

can be delivered, when it can be delivered.
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• Futures contracts are settled daily.

Mechanics of
Futures
Markets
2. Specifications of a new futures contract by the exchange
• • • • acceptable grades/qualities of the asset (orange juice, corn,
Background
treasury bonds) with appropriate price adjustments,
Specifications

CME Group
• contract size, namely, the amount of asset to be delivered
under one contract,
VOB

Futures&Spot • alternative delivery locations and price adjustments for

Margin transportation,
Comparison
• delivery months and precise period during each delivery
Problems
month when delivery can be made,
Review
• daily price change limit, which triggers a signal to stop the
C J I B trade during the rest on the day,

Page 3 of 42 • position limit, which is the maximum number of contract

Go Back a trader may hold.

Close Seller files a notice of intention to deliver with the exchange

and indicates the grade/quality of asset and delivery location.
Mechanics of
Futures
Markets
3. Example: CME Group
• • •
Background

Specifications

CME Group

VOB

Futures&Spot

Margin

Comparison

Problems

Review

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Mechanics of
Futures
Markets
• • •
Background

Specifications

CME Group

VOB

Futures&Spot

Margin

Comparison

Problems

Review

C J I B

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Mechanics of
Futures
Markets
• • •
Background

Specifications

CME Group

VOB

Futures&Spot

Margin

Comparison

Problems

Review

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Mechanics of
Futures
Markets
• • •
Background

Specifications

CME Group

VOB

Futures&Spot

Margin

Comparison

Problems

Review

C J I B
Settlement price is the price used for calculating daily gains
Page 7 of 42
and losses and margin requirements. It is usually the price of
Go Back last traded contract. Change is the change in the settlement
Close price from the previous day. Open interest is the total number
of contracts outstanding.
Mechanics of
Futures
Markets
• • •
Background

Specifications

CME Group

VOB

Futures&Spot

Margin

Comparison

Problems

Review

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Mechanics of
Futures
Markets 4. Example: Vadeli İşlem ve Opsiyon Borsası
• • •
Background

Specifications

CME Group

VOB

Futures&Spot

Margin

Comparison

Problems

Review

C J I B

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Mechanics of
Futures
Markets
• • •
Background

Specifications

CME Group

VOB

Futures&Spot

Margin

Comparison

Problems

Review

C J I B

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Mechanics of
Futures
Markets
• • •
Background

Specifications

CME Group

VOB

Futures&Spot

Margin

Comparison

Problems

Review

C J I B

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Mechanics of
Futures
Markets
• • •
Background

Specifications

CME Group

VOB

Futures&Spot

Margin

Comparison

Problems

Review

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Mechanics of
Futures
Markets
• • •
Background

Specifications

CME Group

VOB

Futures&Spot

Margin

Comparison

Problems

Review

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Mechanics of
Futures
Markets
• • •
Background

Specifications

CME Group

VOB

Futures&Spot

Margin

Comparison

Problems

Review

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Mechanics of
Futures
Daily TL/USD exchange rate and
Markets
futures price for the closest delivery month
• • •

1.7
Background

1.6
Specifications

CME Group 1.5

VOB
1.4

Futures&Spot
spot price
future price
1.3

Margin

Comparison 2006 2007

Problems Daily relative change Date

in TL/USD exchange rate

Review
0.04

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0.02

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0.00

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−0.02

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2006 2007
Mechanics of
Futures
Daily TL/USD exchange rate and
Markets
futures price for the closest delivery month
• • •
Background

1.5
Specifications

CME Group 1.0

VOB
0.5

Futures&Spot
spot price
future price
0.0

Margin

Comparison 1990 1995 2000 2005 2010

Problems Daily relative change Date

in TL/USD exchange rate
0.4

Review
0.3

C J I B
0.2

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0.1
0.0

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−0.1

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1990 1995 2000 2005 2010

Mechanics of
Futures
Markets
5. Convergence of futures price to spot prices
TL/USD exchange rate futures contracts in VOB
• • •
Background
Exchange.Rate
301F_FXUSD1209
Specifications 301F_FXUSD0809
301F_FXUSD0409
CME Group 1.9

VOB
Exchange rate and futures prices

Futures&Spot 1.8

Margin

Comparison
1.7

Problems

Review
1.6

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Date
Mechanics of
Futures
Markets
• • •
Background

Specifications

CME Group

VOB

Futures&Spot

Margin

Comparison

Problems
If futures price > spot price during the delivery month, then
Review
1) selling futures, 2) buying asset, 3) making delivery

C J I B create riskless profit starting with zero investment. More

Page 18 of 42
trades like above will then push the futures price down.
If futures price < spot price during the delivery month, then
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companies interested in the commodity will demand more
Close
futures contracts, which will push futures prices up.
Mechanics of
Futures
Markets
There will always be a difference between the spot price
• • • and futures price, which is called basis, or between spot price
Background
and forward price, before expiry. This is because holders of
Specifications
spot contract receive
CME Group

• dividends if the contract is for a stock index or stock,

VOB

Futures&Spot • coupons if the contract is for a bond,

Margin and pay

Comparison
• transportation, insurance or storage costs (collectively termed
Problems
carry costs) if the contract is for a commodity.
Review
However, the holder of a forward or futures contract receives
C J I B none of the benefits and incurs none of the costs associated

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with the spot contract. At the expiry of the forward or futures
contract the price quoted is the price for delivery now, so it
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is equal to the spot price by definition. But prior to expiry
Close
the basis is not zero, except by chance.
Mechanics of
Futures
Markets
6. Daily settlement and margins
• • •
Background • A margin is cash or marketable securities deposited by an
Specifications investor with his or her broker.
CME Group
• The balance in the margin account is adjusted to reflect
VOB
daily settlement.
Futures&Spot

• Margins minimize the possibility of a loss through a default

Margin
on a contract.
Comparison

Problems Example. An investor takes a long position in two December

Review gold futures contracts on June 5.

C J I B
• Contract size is 100 oz.

Page 20 of 42 • Futures price is 600 USD.

Go Back • Margin requirement is 2,000 USD/contract.

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• Maintenance margin is 1,500 USD/contract.
Mechanics of
Futures
Markets
• • •
Background

Specifications

CME Group

VOB

Futures&Spot

Margin

Comparison

Problems

Review

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Mechanics of
Futures
Markets
7. Comparison of forward and futures contracts
• • •
Background

Specifications

CME Group

VOB

Futures&Spot

Margin

Comparison

Problems

Review

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Mechanics of
Futures
Markets
8. Questions and Problems
• • •
Background Problem 2.3. Suppose that you enter into a short futures
Specifications contract to sell July silver for $10.20 per ounce on the New
CME Group York Commodity Exchange. The size of the contract is 5,000
VOB ounces. The initial margin is $4,000, and the maintenance
Futures&Spot margin is $3,000. What change in the futures price will lead
Margin to a margin call? What happens if you do not meet the
Comparison margin call?
Problems

Review

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Mechanics of
Futures
Markets
8. Questions and Problems
• • •
Background Problem 2.3. Suppose that you enter into a short futures
Specifications contract to sell July silver for $10.20 per ounce on the New
CME Group York Commodity Exchange. The size of the contract is 5,000
VOB ounces. The initial margin is $4,000, and the maintenance
Futures&Spot margin is $3,000. What change in the futures price will lead
Margin to a margin call? What happens if you do not meet the
Comparison margin call?
Problems Solution. If ∆ is the futures price change (drop in this
Review case) which triggers a margin call, then

C J I B ∆ × Number of ounces to be delivered in one contract

Page 23 of 42
≥ initial margin per contract
− maintenance margin per contract,
Go Back

1,000
Close or ∆×5, 000 ≥ 5, 000−4, 000, which implies that ∆ ≥ 5,000
= 0.20.
Mechanics of
Futures
Markets
Question 2.10. Explain how margins protect investors
• • • against the possibility of default.
Background

Specifications

CME Group

VOB

Futures&Spot

Margin

Comparison

Problems

Review

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Mechanics of
Futures
Markets
Question 2.10. Explain how margins protect investors
• • • against the possibility of default.
Background
Answer. Marking the value of the futures contract to mar-
Specifications
ket by maintaining margin accounts is essentially the same as
CME Group
(i) closing the old positions at a profit or loss, and (ii) re-
VOB
taking the same positions at the current futures prices every
Futures&Spot
day.
Margin

Comparison

Problems

Review

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Mechanics of
Futures
Markets
Problem 2.16. On July 1, 2009, a Japanese company
• • • enters into a forward contract to buy $1 million on January
Background
1, 2010. On September 1, 2009, it enters into a forward
Specifications
contract to sell $1 million on January 1, 2010. Describe the
CME Group
profit of loss the company will make in yen as a function of
VOB
the forward exchange rates on July 1, 2009 and September
Futures&Spot
1, 2009.
Margin

Comparison

Problems

Review

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Mechanics of
Futures
Markets
Problem 2.16. On July 1, 2009, a Japanese company
• • • enters into a forward contract to buy $1 million on January
Background
1, 2010. On September 1, 2009, it enters into a forward
Specifications
contract to sell $1 million on January 1, 2010. Describe the
CME Group
profit of loss the company will make in yen as a function of
VOB
the forward exchange rates on July 1, 2009 and September
Futures&Spot
1, 2009.
Margin
Solution. Let us denote by F1 and F2 the forward exchange
Comparison
rates on July 1, 2009 and September 1, 2009. Then the profit
Problems
on January 1, 2010 equals F2 − F1 million yen.
Review

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Mechanics of
Futures
Markets
Question 2.25. It is July 2008. A mining company has
• • • just discovered a small deposit of gold. It will take 6 months
Background
to construct the mine. The gold will then be extracted on a
Specifications
more or less continuous basis for one year. Futures contracts
CME Group
on gold are available on the New York Commodity Exchange.
VOB
There are delivery months every 2 months from August 2008
Futures&Spot
to December 2009. Each contract is for the delivery of 100
Margin
ounces. Discuss how the mining company might use futures
Comparison
markets for hedging.
Problems

Review

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Mechanics of
Futures
Markets
Question 2.25. It is July 2008. A mining company has
• • • just discovered a small deposit of gold. It will take 6 months
Background
to construct the mine. The gold will then be extracted on a
Specifications
more or less continuous basis for one year. Futures contracts
CME Group
on gold are available on the New York Commodity Exchange.
VOB
There are delivery months every 2 months from August 2008
Futures&Spot
to December 2009. Each contract is for the delivery of 100
Margin
ounces. Discuss how the mining company might use futures
Comparison
markets for hedging.
Problems
Answer. Since the mine will start operation six months
Review
later, the unexpected changes in the future price and demand

C J I B
for gold form a risk. Shorting futures with delivery months in
2009 from today will guarantee both a known demand size as
Page 26 of 42
well as price for gold. After removing the uncertainty about
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future revenues, building a new mine in the next six months
Close becomes a business with significantly reduced risks.
Mechanics of
Futures
Markets
Problem 2.27. Suppose that there are no storage costs
• • • for crude oil and the interest rate for borrowing and lending
Background
is 5% per annum. How could you make money on January
Specifications
8, 2007, by trading June 2007 and December 2007 futures
CME Group
contracts? Use the futures prices for delivery months in 2007
VOB
listed in a newspaper on January 8, 2007 as below.
Futures&Spot

Margin

Comparison

Problems

Review

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Mechanics of
Futures
Markets
Problem 2.27. Suppose that there are no storage costs
• • • for crude oil and the interest rate for borrowing and lending
Background
is 5% per annum. How could you make money on January
Specifications
8, 2007, by trading June 2007 and December 2007 futures
CME Group
contracts? Use the futures prices for delivery months in 2007
VOB
listed in a newspaper on January 8, 2007 as below.
Futures&Spot

Margin

Comparison

Problems

Review

C J I B
Solution. The settlement prices for June and December
Page 27 of 42
futures contracts are $60.01 and $62.94 per barrel, respec-
Go Back tively. Each contract is for the delivery of 1,000 barrels.
Close
• On 8 January 2007, long one June contract and short one
Mechanics of
Futures
Markets
December contract of 1,000 barrels of crude oil in CME
• • • Group Exchange (NYMEX, CME, and CBOT merged).
Background

Specifications
• In June 2007, borrow $60.01 × 1, 000 = $60, 010 from money

CME Group
market to pay for one June contract and receive the de-
livery of 1,000 barrels of crude oil.
VOB

Futures&Spot • In December 2007, deliver 1,000 barrels of crude oil re-

Margin ceived in June 2007 and receive $62.94 × 1, 000 = $62, 940.
Comparison After paying our debt $60, 010(1 + 0.05/2) = $61, 510 with
Problems the accrued interest for 1/2-years to the money market,
Review we are left with $62, 940 − $61, 510 = $1, 430 profit.

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Mechanics of
Futures
Markets
Problem 2.29. The author’s Web page contains daily closing
• • • prices for crude oil and gold futures contracts. (Both con-
Background
tracts were traded on NYMEX, which later merged to CME
Specifications
Group with CBOT and CME.) You are required to download
CME Group
the data and answer the following:
VOB
(a) How high do the maintenance margin levels for oil and
Futures&Spot
gold have to be set so that there is a 1% chance that an in-
Margin
vestor with a balance slightly above the maintenance margin
Comparison
level on a particular day has a negative balance 2 days later?
Problems
How high do they have to be for a 0.1% chance? Assume
Review
daily price changes are normally distributed with mean zero.

C J I B
Explain why CME Group might be interested in this calcula-
tion.
Page 29 of 42
One crude oil futures contract is for 1,000 barrels, and
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crude oil futures price is quoted in USD per barrel. One gold
Close futures contract is for 100 ounces, and gold futures price is
quoted in USD per ounce.
Mechanics of
Futures
Markets
Solution.
Crude Oil Futures Prices on NYMEX
• • •

30
Background

Daily futures prices

25
Specifications

CME Group

20
VOB

15
Futures&Spot
1997 1998 1999 2000 2001 2002
Date
Margin
Daily futures price differences

Comparison
0 1

Problems
−3 −2 −1

Review

C J I B
−4

1997 1998 1999 2000 2001 2002

Page 30 of 42 Date

Let D1 and D2 be the daily futures price changes per barrel

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on two consecutive days, and assume that
Close
D1 and D2 are i.i.d. and Normal(0, σ 2) distributed,
Mechanics of
Futures
Markets
where we estimate standard deviation σ with sample standard
• • • deviation as 0.3106 (meanwhile, the sample mean is 0.0021).
Background
Denote by m0.01 and m0.001 the maintenance margins (per
Specifications
contract) which may lead in two days to a negative balance
CME Group
with probabilities 0.01 and 0.001, respectively.
VOB
The total futures price change D1 + D2 in two days has
Futures&Spot √
Normal distribution with zero mean and 0.3106 × 2 = 0.4393
Margin
standard deviation.
Comparison
Because each crude oil futures contract is for the delivery
Problems
of 1,000 barrels, the two-day change in the value of a typical
Review
crude oil futures contract has Normal distribution with zero

C J I B
mean and 1, 000 × 0.4393 = 439.3 standard deviation. Then

Page 31 of 42 0.01 ≥ P{m0.01 + 1, 000(D1 + D2) < 0}

 m 
0.01
Go Back = P{1, 000(D1 + D2) < −m0.01} = Φ −
439.3
Close implies m0.01 ≥ −439.3 × Φ−1(0.01) = −439.3 × (−2.33) = 1023.57,
Mechanics of
Futures
Markets
where Φ(·) is standard Normal distribution function. Similarly,
• • •
Background 0.001 ≥ P{m0.001 + 1, 000(D1 + D2) < 0}
 m 
0.001
Specifications = P{1, 000(D1 + D2) < −m0.001} = Φ −
439.3
CME Group
implies m0.001 ≥ −439.3×Φ−1(0.001) = −439.3×(−3.09) = 1357.44.
VOB
CME Group will want to set the maintenance margin level
Futures&Spot
so that the balance in a trader’s margin account has a very
Margin
low probability of becoming negative.
Comparison
If a trader started with a balance just above the mainte-
Problems
nance margin level and the market moved against her, there
Review would be a margin call at the end of the first day, and the
trader would have until the end of the second day to meet
C J I B

the margin call. Therefore, CME Group is concerned with the

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possibility of a large futures price movement over two days.
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However, exploratory data analysis reveals that the distri-
Close bution of daily futures price changes has heavier tails than a
Normal distribution.
Mechanics of Daily futures price differences are not Normally distributed
Futures

2.0
Markets
prob. density of futures price differences
• • • prob. density of fitted normal distribution

1.5
Background

Density
Specifications

CME Group 1.0

0.5

VOB
0.0

Futures&Spot

−4 −3 −2 −1 0 1 2
Margin
Daily futures price differences

Comparison Boxplots of observed and simulated

Normal Q−Q Plot
futures price differences
Problems ● ●

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Close Obs. price Simul. price

differences differences −3 −2 −1 0 1 2 3

Theoretical Quantiles
Mechanics of
Futures
Markets
This means that negative large daily futures price changes
• • • are more likely than they are implied under Normal assump-
Background
tion, and negative margin account balances under mainte-
Specifications
nance margin levels m0.01 and m0.001 is likely to be larger than
CME Group
1% and 0.1%, respectively. Correctly modeling the stochastic
VOB
process of daily futures price differences is therefore crucial
Futures&Spot
to keep the credit risk low.
Margin
(b) Imagine an investor who starts with a long position in
Comparison
the oil contract at the beginning of period covered by the
Problems
data and keeps the contract for the whole of the period of
Review
time covered by the data. Margin balances in excess of the

C J I B
initial margin are withdrawn. Use the maintenance margin
calculated in (a) for a 1% risk level and assume that the
Page 34 of 42
maintenance margin is 75% of the initial margin. Calculate
Go Back
the number of margin calls and the number of times the in-
Close vestor has a negative margin balance. Assume that all margin
Mechanics of
Futures
Markets
calls are met in your calculations.
• • • From part (a), we found that the maintenance margins
Background
equal m0.01 = 1, 024 and m0.001 = 1, 357. Therefore, the corre-
Specifications
sponding initial margins equal M0.01 = 1, 024/0.75 = 1, 365 and
CME Group
M0.001 = 1, 357/0.75 = 1, 810.
VOB With 0.01 prob. of neg. balance With 0.001 prob. of neg. balance
2000

2000
M0.01 = 1810
Futures&Spot
M0.01 = 1357
m0.01 = 1357
1000

1000
Margin
m0.01 = 1024
Margin account balance

Comparison
0

0
Problems
−1000

−1000
Review
−2000

−2000
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Page 35 of 42
1997 1998 1999 2000 2001 2002 1997 1998 1999 2000 2001 2002

Go Back Date Date

The number of margin calls and the number of days with a
Close
negatives margin account balance are within expected limits
Mechanics of
Futures
Markets
as the following table reports (there are 1204 days of futures
• • • price data):
Background

Probability of a negative balance 1% 0.1%

Specifications

Number of margin calls 171 123

CME Group

Number of days with a negative balance 3 1

VOB
Frequency of a negative balance 0.2% 0.08%
Futures&Spot

[Excel file][R file]

Margin

Comparison

Problems

Review

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Mechanics of
Futures
Markets
9. Review questions and problems
• • •
Background Problem 1.9. You would like to speculate on a rise in the
Specifications price of a certain stock. The current stock price is $29, and
CME Group a 3-month call with a strike price of $30 costs $2.90. You
VOB have $5,800 to invest. Identify two alternative investment
Futures&Spot strategies, one in the stock and the other in an option on the
Margin stock. What are the potential gains and losses from each?
Comparison

Problems

Review

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Mechanics of
Futures
Markets
9. Review questions and problems
• • •
Background Problem 1.9. You would like to speculate on a rise in the
Specifications price of a certain stock. The current stock price is $29, and
CME Group a 3-month call with a strike price of $30 costs $2.90. You
VOB have $5,800 to invest. Identify two alternative investment
Futures&Spot strategies, one in the stock and the other in an option on the
Margin stock. What are the potential gains and losses from each?
Comparison Solution. If we invest entire wealth on the stock at time 0,
Problems then the wealth after T = 1/4 years becomes
Review 5, 800
(ST − 29) × = 200ST − 5, 800
29
C J I B
in terms of the stock price ST at time T . If we invest on call
Page 37 of 42 option written on the same stock with expiration in T = 1/4

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years and strike price K = 30, then the wealth at time T equals
5, 800
Close × (ST − 30)+ − 5, 800
2.9
Mechanics of
Futures 
Markets  − 5, 800, ST < 30,
• • • =
 2, 000 S − 65, 800, S ≥ 30.
Background T T

Specifications The profits from both investment strategies will be at the

CME Group break-even if
VOB
200 ST − 5, 800 = 2, 000 ST − 65, 800
Futures&Spot
1, 800 ST = 60, 000
Margin 600 100
ST = =
Comparison 18 3

Problems If we expect ST ≤ 100/3, investing in stock is more profitable.

Review
If we expect ST > 100/3, investing in call options is more
profitable.
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Mechanics of
Futures
Markets Problem 1.26. The price of gold is currently $600 per ounce.
• • •
The forward price for delivery in 1 year is $800. An arbitrageur
Background

can borrow money at 10% per annum. What should the

Specifications

arbitrageur do? Assume that the cost of storing gold is zero

CME Group
and that gold provides no income.
VOB

Futures&Spot

Margin

Comparison

Problems

Review

C J I B

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Mechanics of
Futures
Markets Problem 1.26. The price of gold is currently $600 per ounce.
• • •
The forward price for delivery in 1 year is $800. An arbitrageur
Background

can borrow money at 10% per annum. What should the

Specifications

arbitrageur do? Assume that the cost of storing gold is zero

CME Group
and that gold provides no income.
VOB
Solution. At time zero,
Futures&Spot
• take short position in the gold futures contract,
Margin

Comparison
• borrow $600 from bank at 10% interest rate,

Problems • buy gold in the spot market.

Review
A year later,

C J I B • deliver the gold to the other party,

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• get $800 in exchange,
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• pay 600 × (1 + 0.1) = 660 USD debt to the bank.
Close
We are left with 800 − 660 = 140 USD as profit.
Mechanics of
Futures
Markets
Problem 1.28. On 12 September 2006, an investor owns
• • • 100 Intel shares. The share price is $19.56 and a January
Background
put option with a strike price of $17.50 costs $0.475. The
Specifications
investor is comparing two alternatives to limit downside risk.
CME Group
The first is to buy one January put option contract with
VOB
a strike price of $17.50. The second involves instructing a
Futures&Spot
broker to sell the 100 shares as soon as Intel’s stock price
$17.50.
Margin
Discuss the advantages and disadvantages of two
Comparison
strategies.
Problems

Review

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Mechanics of
Futures
Markets
Problem 1.28. On 12 September 2006, an investor owns
• • • 100 Intel shares. The share price is $19.56 and a January
Background
put option with a strike price of $17.50 costs $0.475. The
Specifications
investor is comparing two alternatives to limit downside risk.
CME Group
The first is to buy one January put option contract with
VOB
a strike price of $17.50. The second involves instructing a
Futures&Spot
broker to sell the 100 shares as soon as Intel’s stock price
$17.50.
Margin
Discuss the advantages and disadvantages of two
Comparison
strategies.
Problems
Solution. The first alternative (buying American put op-
Review
tions) is more expensive than the second alternative (which

C J I B
simply sells stock when stock price reaches below 17.50).
However, the first alternative also gives more flexibility/opportunit
Page 40 of 42
to distinguish a false alarm from a real problem of decreasing
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stock prices.
Close The optimal exercise boundary of an American put option
Mechanics of
Futures
Markets
with strike price 17.50 is typically lies below 17.50 level, and
• • • even if stock price drops below 17.50, it may later recover
Background
(before it triggers an exercise signal). This may then prevent
Specifications
us from sub-optimally rushing to sell stocks (for example when
CME Group
stock price goes below 17.50 as in the second alternative)
VOB
which can later recover.
Futures&Spot

Margin

Comparison

Problems
Stock price
Review
19.56
17.50
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Exercise region
time
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Sep Jan
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Mechanics of
Futures
Markets
Problem 1.30. A corporate treasurer said: “I will have 1
• • • million GBP to sell in 6 months. If the exchange rate is less
Background
than 2.02, I want you to give me 2.02. If it is greater than
Specifications
2.09, I will accept 2.09. If the exchange rate is between 2.02
CME Group
and 2.09, I will sell the sterling for the exchange rate.” How
VOB
could you use options to satisfy the treasurer?
Futures&Spot

Margin

Comparison

Problems

Review

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Mechanics of
Futures
Markets
Problem 1.30. A corporate treasurer said: “I will have 1
• • • million GBP to sell in 6 months. If the exchange rate is less
Background
than 2.02, I want you to give me 2.02. If it is greater than
Specifications
2.09, I will accept 2.09. If the exchange rate is between 2.02
CME Group
and 2.09, I will sell the sterling for the exchange rate.” How
VOB
could you use options to satisfy the treasurer?
Futures&Spot
Solution. The corporate treasurer
Margin

• European buys put on USD/GBP exchange rate with 6-

Comparison
month maturity and strike price 2.02 USD/GBP,
Problems

Review • sells European call option on USD/GBP exchange rate

with 6 month maturity and strike price 2.09.
C J I B

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