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Pricing Currency Futures

CFA® Exam, CFA® Exam Level 2, Derivatives

This lesson is part 14 of 15 in the course Derivatives Part 1
  • Currency futures are priced in the same manner as currency forward contracts.
  • Price of a Currency Future with Simple Compounding:
  • f(0,T)X/Y = S0,X/Y ((1+rX)/(1+rY))T

    • T = total contract length
    • S0 = Spot exchange rate for X/Y (#X units domestic per 1Y foreign) at initiation
    • rX = Risk free rate in country X (domestic currency)
    • rY = Risk free rate in country Y (foreign currency)
  • Price of a Currency Future with Continuous Compounding
  • f(0,T)X/Y = (S0,X/Y e-ryT ) erxT
  • If the currency future is not “fairly” priced (i.e. not priced based on an arbitrage relationship based on risk free rates), then it is possible for a trader to earn a risk-free arbitrage profit.
  • Futures Market Overvalues a Currency:
    1. Sell the overvalued futures contract
    2. Buy the underlying currency in the spot market
    3. Borrow and invest all cash flows
Previous Lesson

‹ Pricing Interest Rate/Treasury Bond Futures

Next Lesson

Eurodollar Futures ›

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In this Course

  • CFA Level 2: Derivatives Part 1 – Introduction
  • What are Forward Contracts?
  • Equity Forward Contracts
  • Fixed Income Forward Contracts
  • Currency Forward Contracts
  • Forward Rate Agreements (FRA)
  • Credit Risk and Forward Contracts
  • Introduction to Futures Contracts
  • Futures: Convergence of Spot and Futures Prices at Expiration
  • Futures Prices vs. Forward Prices
  • Contago and Backwardation
  • Pricing Stock Index Futures
  • Pricing Interest Rate/Treasury Bond Futures
  • Pricing Currency Futures
  • Eurodollar Futures

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