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Forwards, Futures
and Money Market Hedging
l Types of exposure
l One-shot exposure
l Hedging approaches:
u Open
u Forward
u Money market
u Futures
u Options
Forward Contracts
Soles
SAN-
SAN-
Backus
Backus TANDER
TANDER
SHORT LONG
Today
T+2
T+90
Methods:
- Spot + swap
- Spot + rollover swap
- Money market
- Outright forward
Copyright ©1997 Ian H. Giddy Forwards, Futures and Money-Market Hedging 15
Giddy Forwards, Futures and Money-Market Hedging/6
3-month Swap
SPOT
(LEFT SCALE)
EXCHANGE
RATE, YEN
PER US$
140 24
23
22
FORWARD 21
135 (LEFT SCALE) 20
19
18
17
130 16
15
14
13
FORWARD
125 12
PREMUIM,
PERCENT
11
PER ANNUM
10
9
120 8
7
FORWARD PREMIUM 6
(RIGHT SCALE) 5
115 4
3
2
1
110 0
MONTHLY DATA, 1987-1989
Interest
Interest rate
rate
differential
differential
Expected
Expected
Forward
Forward
%
% change
change in
in
premium
premium
exchange
exchange rate
rate
Cost of Hedging
Frutas Amazonas
Frutas Amazonas
.05%
1.9
1.85
1.8
.63%
1.75
1.25%
1.7 1.44%
1.65 1.62%
1.6
3.96%
1.55
6.34%
1.5
OFFER
1.45
1.4
BID
1.35
1.3
SPOT 2 YR 3 YR 4 YR 5 YR 7 YEAR 10 YEAR
FUTURES PRICES,
DAILY DM
Marking-to- US$ PER MARK
0.65
FUTURES PRICE
MOVEMENTS
Market of a 0.645
Futures 0.64
FUTURES
Contract 0.635
SPOT
0.63
0.625
-25 -20 -15 -10 -5 -1
DAYS BEFORE SETTLEMENT DATE
LONG POSITION
SHORT POSITION