Question

Currency futures 

i) Describe the daily marking to market process in currency futures markets in two or three sentences [Hint: Use numerical example to illustrate answer if it helps]. 

ii) What are the two main differences between currency forward/futures contracts and currency options?

Answer 1

(i)

Mark-to-market (MTM) is an accounting method that records the value of an asset according to its current market price.MTM is used to price futures contracts, which is very important for investors who trade futures in margin accounts.

In currency futures trading Mark-to-market is also known as daily settlement. In mark-to-market the profit or loss of the contract is realized at the end of each trading day. This mark-to-market prevents the accumulation of losses beyond the point of affordability by the losing party and helps the clearing house reduce its risk of guaranteeing the performance of every futures contract.

for eg -An investor purchases 100 shares in a company for $10 per share. The book value of their investment is $1,000. In the trading day following the purchase, the company's stock price falls by 10%. The mark-to-market value is therefore $900.

(ii)

basis	Currency Futures	Currency Options
Transaction mandatory	Yes; the buyer and seller are both obligated to complete the transaction on the specified date at the price set in the contract.	No; the buyer has the option but not the obligation to complete the transaction. The seller is obliged to transact if the buyer of the option chooses. The price at which the transaction will occur is set in the option contract.
Transaction date	The date specified in the contract	Any time before the expiry date specified in the contract