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1、ChapterChapter2020ForeignCurrencyFuturesandOptionsThischapterconsidersforeigncurrencyfuturesandoptionsanddemonstrateshowtheycanbeusedforhedgingorspeculativepurposes.Becausetheprofitsandlossesearnedonfuturesandoptioncontracts,aswellasthoseearnedonforwardcontracts,dependo
2、nhowthespotexchangerateevolvesovertime,alltheseinstrumentsareconsideredderivativesecurities.Derivativesecuritiesaresecuritieswhosevaluesdependonthevaluesofother,morebasicunderlyingvariables—inthiscase,thespotexchangerate.Aswithotherinstrumentsintheforeignexchangemarket,
3、muchofthetradeinfuturescontractsandoptionsisconductedbybanks.Commercialandinvestmentbanksdealaggressivelyinforeigncurrencyoptionsinordertomeetthedemandsoftheircorporateandinstitutionalcustomers,whousethemtohedgetheirforeignexchangerisks.Inadditiontobanks,hedgefundsandot
4、herinvestorstradeforeigncurrencyfuturesandoptionspurelyforspeculativepurposes—thatis,strictlyinordertoearnaprofit.Thischapterbeginsbyintroducingtheforeigncurrencyfuturesmarketanddiscussinghowfuturesandforwardcontractsdiffer.Itthendiscusseshedgingwithfutures.Sections20.3
5、and20.4presentthebasicsofforeigncurrencyoptionsandtheiruseinriskmanage-ment.Section20.5examinessomeexoticoptions.AswefirstmentionedinChapter3,exoticderivativescausedalargenumberofinternationalfirmsinemergingmarketstosuffersub-stantiallossesduringthe2007to2010globalfinan
6、cialcrisis,anditisimportanttounder-standtherisksinvolved.20.1THEBASICSOFFUTURESCONTRACTSFuturesVersusForwardsForeigncurrencyfuturescontractsallowindividualsandfirmstobuyandsellspecificamountsofforeigncurrencyatanagreed-uponpricedeterminedonagivenfutureday.Althoughthisso
7、undsverysimilartotheforwardcontractsdiscussedinChapter3,thereareanumberofimportantdifferencesbetweenforwardcontractsandfuturescontracts.ExchangeTradingThefirstmajordifferencebetweenforeigncurrencyfuturescontractsandforwardcon-tractsisthatfuturescontractsaretradedonanexc
8、hange,whereasforwardcontractsare671madebybanksandtheirclients.ExamplesoffuturesexchangesincludetheCMEGroupwith
