Lecture 7: Derivatives I: Currency and interest rate futures

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Lecture 7 Derivatives I Currency and interest
rate futures

• Galina A Schwartz
• Department of Finance
• Business School
• University of Michigan

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Plan of todays lecture

• Chapter 11, Levich
• Forward contract
• and currency forward contract
• Future contract
• Marking to market
• Major players terminology

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Terminology

• Forward interest rate
• Forward rate agreement FDA
• Players CME, CBOT, SIMEX, etc.
• Term structure of interest rates
• Levich, p. 377 Currency risk premium
• Froot and Frankel
• Error risk premium
• forecast bias
• rational error

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Currently

• Current trends
• A very rough view
• Volatility up, down and the reasons?
• Term structure of interest rates
• Currency premium?
• How to reduce volatility?
• -- Improve efficiency
• -- Impose regulation

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Summary

• Forward and future contracts
• -- similar instruments,
• -- but institutionally they differ
• -- historically behavior is similar
• Who prefers which?
• The hedges do not value liquidity
• -- prefer forward contracts
• Small investors
• -- prefer future contracts
• Important considerations
• Regulation pros and cons

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What is next

• Derivatives II, Chapter 12, Levich
• Next Monday lecture cancelled!!
• Next Wed, November 22, 2000 a double lecture
• From 10am to 100pm