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1、McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-1Chapter Outline25.1 Forward Contracts25.2 Futures Contracts25.3 Hedging25.4 Interest Rate Futures Contracts25.5 Duration Hedging25.6 S25.7 Actual Use of Derivatives25.8 Summary & Conclusions第一页,共五十五页。McGra
2、w-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-225.1 Forward Contracts A forward contract specifies that a certain commodity will be exchanged for another at a specified time in the future at prices specified today. Its not an option: both parties are expected t
3、o hold up their end of the deal. If you have ever ordered a textbook that was not in stock, you have entered into a forward contract.第二页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-325.2 Futures Contracts: Preliminaries A futures contract is like a
4、 forward contract: It specifies that a certain commodity will be exchanged for another at a specified time in the future at prices specified today. A futures contract is different from a forward: Futures are standardized contracts trading on organized exchanges with daily resettlement (“marking to m
5、arket”) through a clearinghouse.第三页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-4Futures Contracts: Preliminaries Standardizing Features: Contract Size Delivery Month Daily resettlement Minimizes the chance of default Initial Margin About 4% of con
6、tract value, cash or T-bills held in a street name at your brokerage.第四页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-5Daily Resettlement: An ExampleSuppose you want to speculate on a rise in the $/ exchange rate (specifically you think that the dol
7、lar will appreciate). Currently $1 = 140. Currency per U.S. $ equivalent U.S. $WedTueWedTueJapan (yen)0.0071428570.0071942451401391-month forward0.0069930070.0070422541431423-months forward0.0066666670.0067114091501496-months forward0.006250.006289308160159The 3-month forward price is $1=150.第五页,共五十
8、五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-6Daily Resettlement: An Example Currently $1 = 140 and it appears that the dollar is strengthening. If you enter into a 3-month futures contract to sell at the rate of $1 = 150 you will make money if the yen
9、 depreciates. The contract size is 12,500,000 Your initial margin is 4% of the contract value:150$1012,500,00.04 $3,333.33 第六页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-7Daily Resettlement: An ExampleIf tomorrow, the futures rate closes at $1 = 1
10、49, then your positions value drops.Your original agreement was to sell 12,500,000 and receive $83,333.33:149 $1012,500,0062.892,83$You have lost $559.28 overnight.But 12,500,000 is now worth $83,892.62:150$1012,500,00 $83,333.33 第七页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies
11、, Inc. All rights reserved.25-8Daily Resettlement: An Example The $559.28 comes out of your $3,333.33 margin account, leaving $2,774.05 This is short of the $3,355.70 required for a new position.149$1012,500,00.04 $3,355.70 Your broker will let you slide until you run through your maintenance margin
12、. Then you must post additional funds or your position will be closed out. This is usually done with a reversing trade.第八页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-9Selected Futures ContractsContractContract SizeExchangeAgriculturalCorn5,000 bus
13、helsChicago BOTWheat5,000 bushelsChicago & KCCocoa10 metric tonsCSCEOJ15,000 lbs.CTNMetals & PetroleumCopper25,000 lbs.CMX Gold100 troy oz.CMXUnleaded gasoline42,000 gal.NYMFinancialBritish Pound62,500IMMJapanese Yen12.5 millionIMMEurodollar$1 millionLIFFE第九页,共五十五页。McGraw-Hill/IrwinCopyright
14、 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-10Futures Markets The Chicago Mercantile Exchange (CME) is by far the largest. Others include: The Philadelphia Board of Trade (PBOT) The MidAmerica Commodities Exchange The Tokyo International Financial Futures Exchange The London Inte
15、rnational Financial Futures Exchange第十页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-11The Chicago Mercantile Exchange Expiry cycle: March, June, September, December. Delivery date 3rd Wednesday of delivery month. Last trading day is the second busi
16、ness day preceding the delivery day. CME hours 7:20 a.m. to 2:00 p.m. CST.第十一页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-12CME After Hours Extended-hours trading on GLOBEX runs from 2:30 p.m. to 4:00 p.m dinner break and then back at it from 6:00
17、 p.m. to 6:00 a.m. CST. Singapore International Monetary Exchange (SIMEX) offer interchangeable contracts. Theres other markets, but none are close to CME and SIMEX trading volume.第十二页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-13Wall Street Journ
18、al Futures Price QuotesOpenOpenHighLowSettleChangeHighLowInterestJuly179180178178-13121772,837Sept186186184186-280184104,900Dec196197194196-291194175,187Sept117-05117-21116-27117-05+5131-06 111-15647,560Dec116-19117-05116-12116-21+5128-28 111-0613,857Sept11200112851114511241-1711324787518,530Dec1128
19、7113851125511349-171143079871,599LifetimeCorn (CBT) 5,000 bu.; cents per bu.TREASURY BONDS (CBT) - $1,000,000; pts. 32nds of 100%DJ INDUSTRIAL AVERAGE (CBOT) - $10 times averageExpiry monthOpening priceHighest price that day Lowest price that dayClosing priceDaily ChangeHighest and lowest prices ove
20、r the lifetime of the contract.Number of open contracts第十三页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-14Basic Currency Futures Relationships Open Interest refers to the number of contracts outstanding for a particular delivery month. Open interes
21、t is a good proxy for demand for a contract. Some refer to open interest as the depth of the market. The breadth of the market would be how many different contracts (expiry month, currency) are outstanding.第十四页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reser
22、ved.25-1525.3 Hedging Two counterparties with offsetting risks can eliminate risk. For example, if a wheat farmer and a flour mill enter into a forward contract, they can eliminate the risk each other faces regarding the future price of wheat. Hedgers can also transfer price risk to speculators and
23、speculators absorb price risk from hedgers. Speculating: Long vs. Short第十五页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-16Hedging and Speculating ExampleYou speculate that copper will go up in price, so you go long 10 copper contracts for delivery
24、in 3 months. A contract is 25,000 pounds in cents per pound and is at $0.70 per pound or $17,500 per contract. If futures prices rise by 5 cents, you will gain:Gain = 25,000 .05 10 = $12,500If prices decrease by 5 cents, your loss is: Loss = 25,000 -.05 10 = -$12,500第十六页,共五十五页。McGraw-Hill/IrwinCopyr
25、ight 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-17Hedging: How many contacts?You are a farmer and you will harvest 50,000 bushels of corn in 3 months. You want to hedge against a price decrease. Corn is quoted in cents per bushel at 5,000 bushels per contract. It is currently at
26、$2.30 cents for a contract 3 months out and the spot price is $2.05. To hedge you will sell 10 corn futures contracts:Now you can quit worrying about the price of corn and get back to worrying about the weather.contracts 10contractper bushels 000, 5 bushels 000,50第十七页,共五十五页。McGraw-Hill/IrwinCopyrigh
27、t 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-1825.4 Interest Rate Futures Contracts Pricing of Treasury Bonds Pricing of Forward Contracts Futures Contracts Hedging in Interest Rate Futures第十八页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights re
28、served.25-19Pricing of Treasury BondsConsider a Treasury bond that pays a semiannual coupon of $C for the next T years: The yield to maturity is rTTrrCrFPV)1 (11)1 (Value of the T-bond under a flat term structure= PV of face value + PV of coupon paymentsC0 1 2 3 2TCFC C第十九页,共五十五页。McGraw-Hill/IrwinCo
29、pyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-20Pricing of Treasury BondsIf the term structure of interest rates is not flat, then we need to discount the payments at different rates depending upon maturityTTrFCrCrCrCPV)1 ()1 ()1 ()1 (233221= PV of face value + PV of coupon
30、paymentsC0 1 2 3 2TCFC C第二十页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-21Pricing of Forward ContractsAn N-period forward contract on that T-Bond C0 NN+1 N+2 N+3 N+2TCFC CforwardPCan be valued as the present value of the forward price.NNTTNNNNrrFC
31、rCrCrCPV)1 ()1 ()1 ()1 ()1 (233221NNforwardrPPV)1 ( 第二十一页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-22Futures Contracts The pricing equation given above will be a good approximation. The only real difference is the daily resettlement.第二十二页,共五十五页。
32、McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-23Hedging in Interest Rate Futures A mortgage lender who has agreed to loan money in the future at prices set today can hedge by selling those mortgages forward. It may be difficult to find a counterparty in th
33、e forward who wants the precise mix of risk, maturity, and size. Its likely to be easier and cheaper to use interest rate futures contracts however.第二十三页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-2425.5 Duration Hedging As an alternative to hedgi
34、ng with futures or forwards, one can hedge by matching the interest rate risk of assets with the interest rate risk of liabilities. Duration is the key to measuring interest rate risk.第二十四页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-25 Duration me
35、asures the combined effect of maturity, coupon rate, and YTM on bonds price sensitivity Measure of the bonds effective maturity Measure of the average life of the security Weighted average maturity of the bonds cash flows25.5 Duration Hedging第二十五页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-
36、Hill Companies, Inc. All rights reserved.25-26Duration FormulaNtttNtttTrCrtCDPVTCPVCPVCPVD1121)1 ()1 ()(2)(1)(第二十六页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-27Calculating DurationCalculate the duration of a three-year bond that pays a semi-annua
37、l coupon of $40, has a $1,000 par value when the YTM is 8% semiannually?第二十七页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-28DiscountPresentYears x PVYearsCash flowfactorvalue/ Bond price0.5$40.000.96154$38.460.01921$40.000.92456$36.980.03701.5$40.0
38、00.88900$35.560.05332$40.000.85480$34.190.06842.5$40.000.82193$32.880.08223 $1,040.000.79031$821.932.4658$1,000.002.7259 yearsBond price Bond durationCalculating DurationDuration is expressed in units of time; usually years.第二十八页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, In
39、c. All rights reserved.25-29DurationThe key to bond portfolio management Properties: Longer maturity, longer duration Duration increases at a decreasing rate Higher coupon, shorter duration Higher yield, shorter duration Zero coupon bond: duration = maturity第二十九页,共五十五页。McGraw-Hill/IrwinCopyright 200
40、2 by The McGraw-Hill Companies, Inc. All rights reserved.25-3025.6 Swaps Contracts: Definitions In a swap, two counterparties agree to a contractual arrangement wherein they agree to exchange cash flows at periodic intervals. There are two types of interest rate swaps: Single currency interest rate
41、swap “Plain vanilla” fixed-for-floating swaps are often just called interest rate swaps. Cross-Currency interest rate swap This is often called a currency swap; fixed for fixed rate debt service in two (or more) currencies.第三十页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc.
42、 All rights reserved.25-31The S A s is a generic term to describe a financial institution that facilitates swaps between counterparties. The s can serve as either a broker or a dealer. As a broker, the s matches counterparties but does not assume any of the risks of the swap. As a dealer, the s stan
43、ds ready to accept either side of a currency swap, and then later lay off their risk, or match it with a counterparty. 第三十一页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-32An Example of an Interest Rate Swap Consider this example of a “plain vanilla
44、” interest rate swap. Bank A is a AAA-rated international bank located in the U.K. and wishes to raise $10,000,000 to finance floating-rate Eurodollar loans. Bank A is considering issuing 5-year fixed-rate Eurodollar bonds at 10 percent. It would make more sense to for the bank to issue floating-rat
45、e notes at LIBOR to finance floating-rate Eurodollar loans.第三十二页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-33An Example of an Interest Rate Swap Firm B is a BBB-rated U.S. company. It needs $10,000,000 to finance an investment with a five-year ec
46、onomic life. Firm B is considering issuing 5-year fixed-rate Eurodollar bonds at 11.75 percent. Alternatively, firm B can raise the money by issuing 5-year floating-rate notes at LIBOR + percent. Firm B would prefer to borrow at a fixed rate.第三十三页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-
47、Hill Companies, Inc. All rights reserved.25-34An Example of an Interest Rate SwapThe borrowing opportunities of the two firms are: COMPANY B BANK A Fixed rate 11.75% 10% Floating rate LIBOR + .5% LIBOR 第三十四页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved
48、.25-35An Example of an Interest Rate SwapBank AThe s makes this offer to Bank A: You pay LIBOR 1/8 % per year on $10 million for 5 years and we will pay you 10 3/8% on $10 million for 5 years COMPANY B BANK A Fixed rate 11.75% 10% Floating rate LIBOR + .5% LIBOR Swap BankLIBOR 1/8%10 3/8%第三十五页,共五十五页
49、。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-36 COMPANY B BANK A Fixed rate 11.75% 10% Floating rate LIBOR + .5% LIBOR An Example of an Interest Rate SwapHeres whats in it for Bank A: They can borrow externally at 10% fixed and have a net borrowing posit
50、ion of -10 3/8 + 10 + (LIBOR 1/8) =LIBOR % which is % better than they can borrow floating without a swap. 10% of $10,000,000 = $50,000. Thats quite a cost savings per year for 5 years.Swap BankLIBOR 1/8%10 3/8%Bank A第三十六页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All
51、rights reserved.25-37An Example of an Interest Rate SwapCompany BThe s makes this offer to company B: You pay us 10% per year on $10 million for 5 years and we will pay you LIBOR % per year on $10 million for 5 years.Swap Bank10 %LIBOR % COMPANY B BANK A Fixed rate 11.75% 10% Floating rate LIBOR + .
52、5% LIBOR 第三十七页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-38 COMPANY B BANK A Fixed rate 11.75% 10% Floating rate LIBOR + .5% LIBOR An Example of an Interest Rate SwapThey can borrow externally at LIBOR + % and have a net borrowing position of 10
53、+ (LIBOR + ) - (LIBOR - ) = 11.25% which is % better than they can borrow floating. LIBOR + %Heres whats in it for B: % of $10,000,000 = $50,000 thats quite a cost savings per year for 5 years.Swap BankCompany B10 %LIBOR %第三十八页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc.
54、 All rights reserved.25-39An Example of an Interest Rate SwapThe s makes money too.% of $10 million = $25,000 per year for 5 years.LIBOR 1/8 LIBOR = 1/8 10 - 10 3/8 = 1/8 Swap BankCompany B10 %LIBOR %LIBOR 1/8%10 3/8%Bank A COMPANY B BANK A Fixed rate 11.75% 10% Floating rate LIBOR + .5% LIBOR 第三十九页
55、,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-40An Example of an Interest Rate SwapSwap BankCompany B10 %LIBOR %LIBOR 1/8%10 3/8%Bank AB saves %A saves %The s makes % COMPANY B BANK A Fixed rate 11.75% 10% Floating rate LIBOR + .5% LIBOR 第四十页,共五十五页。
56、McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-41An Example of a Currency Swap Suppose a U.S. MNC wants to finance a 10,000,000 expansion of a British plant. They could borrow dollars in the U.S. where they are well known and exchange for dollars for pounds
57、. This will give them exchange rate risk: financing a sterling project with dollars. They could borrow pounds in the international bond market, but pay a premium since they are not as well known abroad.第四十一页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved
58、.25-42An Example of a Currency Swap If they can find a British MNC with a mirror-image financing need they may both benefit from a swap. If the spot exchange rate is S0($/) = $1.60/, the U.S. firm needs to find a British firm wanting to finance dollar borrowing in the amount of $16,000,000.第四十二页,共五十
59、五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-43An Example of a Currency SwapConsider two firms A and B: firm A is a U.S.based multinational and firm B is a U.K.based multinational.Both firms wish to finance a project in each others country of the same
60、size. Their borrowing opportunities are given in the table below. $ Company A 8.0% 11.6% Company B 10.0% 12.0% 第四十三页,共五十五页。McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.25-44$9.4%An Example of a Currency Swap $ Company A 8.0% 11.6% Company B 10.0% 12.0% Firm B$8%12%Swap
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