FORWARDS These contracts are traded in the OTC. This kind of contract is not traded to through the exchanges.

They are not standardized and have varied features. We will have to fix the price and the delivered date. There is a risk of default of the counterpart. PAY OFF: it will be the difference between the spot price multiplied by the total amount of the contract and the forward price multiplied by the total amount of the contract. PAY OFF= S (T)- F (T)

FUTURES This is a contract to buy or sell an asset for a specific price at pre-determined time. If you buy a future contract it means that you promise to pay the price of the asset at specified time. If you sell a future, you make a promise to transfer the asset to the buyer of the future at a specified price at particular time. Every Future has the following features: -Buyer -Seller -Price -Expiry Some of the most popular assets on which futures contracts are available are: equity stocks, indices, commodities and CURRENCY This kind of contract is trade in CHICAGO, so all the values are expressed in dollars. In this kind of contract we cannot take advantage of the fluctuations because we have to wait a long time to receive the total amount of the contract. To avoid the risk of counterpart there are: Clearing houses We will have two margins accounts

According to fluctuations of the exchange rate you will gain and loose money, so in case

of problem, we will sell the contract at price of the market and someone will buy it, thanks to the margin accounts. Only the members of the clearinghouse can manage the margin accounts. MARGINS: -Margin account -Initial margin: The initial value in the margin account -Marking to market: the value of your future contracts must be exactly the value of the market (spot rate). The value of your future contract will depend of the market. -Maintenance margins: the minimum that you have to have in your account. -Margin call: When your broker calls you to inject money to the margin account. You have to inject the money necessary to be in the initial margin. There is a margin call only when you are below of the maintenance margin. If you have a FUTURE contract you have to wait to the maturity day, there are not transactions before. The future market is the more liquid one. Appreciation of the dollar and depreciation of the euro (or foreign currency) is the main risk *The fluctuation will decrease, when you are near to the maturity day.

We will standardize the contract. There are 4 maturity days. May, June, September The clear house is the counterpart so there is not risk of default.

OPTIONS These contracts are instruments that give the holder of the instrument the RIGHT to buy or sell an asset at PREDETERMINED PRICE. There are two kinds of options: CALL OPTION: Gives the buyer the right to buy the asset (currency) at a given price. This given price is called STRIKE PRICE (K). If the holder of the call option demands the sale of the asset from the seller, the seller has the obligation to sell the asset. But the holder of the call option can buy the asset or not buy it if they want. If the buyer wants to buy the asset, the seller has to sell it. The seller does not have a right.

Call option intrinsic value: maximum (S-K, 0) *(size of the contract)

PUT OPTION: This kind of contract gives the buyer a right to sell the asset at the strike price (K) to the buyer. Here the buyer has the right to sell and the seller has the obligation to buy. Put option intrinsic value: maximum of (K - S, 0) * (Size of the contract)

So in any options contract, the right to exercise the option is vested with the buyer of the contract. The seller of the contract has only the obligation and no right. As the seller of the contract bears the obligation, he is paid a price called as 'premium'. Therefore the price that is paid for buying an option contract is called as premium. The buyer of a call option will not exercise his option to buy if, on expiry (maturity time), the price of the asset in the spot market is less than the strike price of the call. For example: Itzel bought a call option at a strike price of $500. On expiry the price of the asset is $450. Itzel will not exercise his call option because she can buy the same asset from the market at $450, rather than paying $500 to the seller of the option. The buyer of a put option will not exercise his option to sell if, on expiry, the price of the asset in the spot market is more than the strike price of the call. For example: Itzel bought a put option at a strike price of $600. On expiry the price of the asset is $619. Itzel will not exercise her put option because she can sell the same asset in the market at $619, rather than giving it to the seller of the put option for $600. For the American options, you can exercise the option when you want (before the maturity date) but in the European option you cant do that, you have to wait until maturity date. To have profits you have to sell when the Spot price is higher than strike price.

Normally the options are trade on the NASDAQ OMX PHLX (Philadelphia exchange market)

The price of the option is expressed in terms of cents per unit. Example (0.0456/EUR) The cost of hedging one unit of foreign currency is .0456; if we hedge 10,000 euros we have to pay 456 dollars. The price of options changes according to the months