44 lines
2.9 KiB
Plaintext
44 lines
2.9 KiB
Plaintext
473
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SPreAD TrADINg IN CUrreNCY FUTUreS
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Thus, the equal dollar value spread would consist of 1.6 BP contracts per euro contract, or 8 BP to
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5 euro.
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equity fluctuations in an equal-dollar-value intercurrency spread position will mirror the price
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ratio (or exchange rate) between currencies. It should be emphasized that price ratios (as opposed to
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price spreads) are the only meaningful means of representing intercurrency spreads. For example, if
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the BP = $1.50 and SF = $1.00, an increase of $0.50 in both the currencies will leave the price spread
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between the BP and SF unchanged, even though it would drastically alter the relative values of the two
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currencies: a decline of the BP vis-à-vis the SF from 1.5 SF to 1.33 SF.
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■ Intracurrency Spreads
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An intracurrency spread—the price difference between two futures contracts for the same currency—
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directly reflects the implied forward interest rate differential between dollar-denominated accounts
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and accounts denominated in the given currency. For example, the June/December euro spread
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indicates the expected relationship between six-month eurodollar and euro rates in June.
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1
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T o demonstrate the connection between intracurrency spreads and interest rate differentials, we
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compare the alternatives of investing in dollar-denominated versus euro-denominated accounts:
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S = spot exchange rate ($/euro)
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F = current forward exchange rate for date at end of investment period ($/euro)
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r
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1 = simple rate of return on dollar-denominated account for investment period (nonannualized)
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r2 = simple rate of return on euro-denominated account for investment period (nonannualized)
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alternative a:
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Invest in Dollar-Denominated account
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alternative B:
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Invest in euro-Denominated account
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1. Invest $1 in dollar-denominated account. 1. Convert $1 to euro at spot.
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2. Funds at end of period = $1 (1 + r1) exchange rate is S, which yields 1/S euro. (By definition, if S equals dollars
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per euro, 1/S = euro per dollar.)
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2. Invest 1/S euro in euro-denominated account at r
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2.
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3. Lock in forward exchange rate by selling the anticipated euro proceeds
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at end of investment period at current forward rate F.2
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4. Funds at end of period = 1/S (1 + r2) euro.
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5. Converted to dollars at rate F, funds at end of period = $F/S (1 + r2)
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(since F = dollars per euro).
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1 The eurocurrency rates are interest rates on time deposits for funds outside the country of issue and hence free
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of government controls. For example, interest rates on dollar-denominated deposits in London are eurodollar
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rates, while rates on sterling-denominated deposits in Frankfurt are eurosterling rates. The quoted eurocurrency
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rates represent the rates on transactions between major international banks.
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2 A short forward position can be established in one of two ways: (1) selling futures that are available for forward
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dates at three-month intervals; and (2) initiating a long spot/short forward position in the foreign exchange (FX)
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swap market and simultaneously selling spot. |