SWAP Agreements LECTURE 06

SWAPS  Basic meaning of SWAP is “something that is exchanged”  A currency swap refers to a spot sale of a currency combined with a forward repurchase of the same currency as part of a single transaction.  For example suppose that Citibank receives a $1 million payment today that it will need in three months, but in the mean time it wants to invest this sum in Euros.CITI BANK would incur lower brokerage fee by swapping the $1 million into EUROS with Frankfurt's deutsche bank as part of a single transaction or deal instead of selling dollars for Euros in the spot market today and at the same time repurchasing dollars for euros in the forward market for delivery in three months in two separate transactions.

Foreign exchange FUTURE  A Foreign exchange future is a forward contract for standardized currency amounts and selected calendar dates traded on an organized exchange market.  The currencies traded on the international monetary Market are the Japanese Yen, the Canadian dollar, the British pounds, the Swiss Franc, the Australian dollar, and the Euro

The futures market differs form a forward market in that in the future market only a few currencies are traded;trade occurs in standardized contracts only, for a few specific delivery dates, and are subject to daily limits on exchange rate fluctuations and trading takes place only in a few geographical locataions,such as Chicago, New York,London,Frankfurt and Singapore.

 Future contracts are usually for a smaller amounts than forward contracts and thus are more useful fo small firms than to large one but are somewhat more expensive.  Future contracts can also be sold at any time up until maturity on an organized future market while forward contracts can not.

Foreign Exchange Option  A foreign exchange Option is a contract giving the purchaser the right, but not the obligation,to buy(a call option) or to sell(a put option )a standard amount of a traded currency on a stated date( the European option ) or at any time before a stated date(American option ) and at a stated price( the exercise or strike price)  The buyer of the contract has the choice to purchase or forego the purchase if it turns out to be unprofitable.

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