Futures, Options and swaps

timer Asked: Oct 21st, 2018
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Question Description

Write a 4 page paper discussing currency Futures, currency swaps and currency options. Also give examples wherever possible. Talk about what they are, how they came about, who utilize them or where they are used and any other information on them.

Tutor Answer

School: UC Berkeley

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Futures, Options and Swaps
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Currency future is also called foreign exchange future, and it refers to a prospects
agreement to interchange one exchange for an alternative at an indicated time impending at a
price or exchange rate which is fixed on the buying date. There are many currency futures
contracts available for the investors to take. The common one is; the Euro/ US dollar currency
futures contract, E-micro forex futures contracts this contract trades at 1/10th the size of even
currency futures agreements and evolving marketplace currency sets. These contracts sell within
a fluctuating degree of liquidity (Robert, & James, 2007).
Currency futures are traded on the exchange that provides regulations regarding unified
valuing and clearance. Thus, the marketplace worth for a currency futures contract will be quite
the same irrespective of the broker involved. The Chicago Mercantile Exchange group is the
leading controlled currency future market in the world. The other small exchanges in the world
are NYSE Euronext, the Brazilian Mercantile and future exchange (BM&F) and the Tokyo
financial exchange (TFX) (Robert, & James, 2007).
The trading of the currency futures has very many benefits to the trader some of which
are making money, in the case where the trading gains a profit the investor ends up making some
real cash also it helps in understanding how the international trade works. It also helps the traders
to get a way of investment that has the possibility of the highest return however they are a very
risky investment for that matters, and if not careful a person seeking to reap profit might end up
making significant losses.


An example to demonstrate the currency future a is buyer agreeing to buy euros at $1.25 US. At
the end of the agreement, the buyer will be needed to buy 125,000 euros at 1.25 dollars. In this
case, the seller of the contract delivers the euros and received USD.
Currency Swap
A currency swap refers to a contract where two parties interchange the principal amount
of debt and the interest in one exchange for the principal and interest in another transaction. The
corresponding principal totals are switched at the spot rate (Robert, & James, 2007). Currency
swap in the foreign exchange applies whereby one party borrows one currency from and
simultaneously lend another to the secondary party. In this kind of transaction, the payment
responsibility is the collateral, and the total of settlement is fixed at the forex forward rate as of
the state of the contract. Thus, it works as follows on the date of the trade, the counterparties’
exchanges notional amount...

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