Question regarding currency derivatives

Reference no: EM13116960

Currency futures markets are commonly used as a means of capitalizing on shifts in currency values, because the value of a futures contract tends to move in line with the change in the corresponding currency value. Recently, many currencies appreciated against the dollar. Most speculators anticipated that these currencies would continue to strengthen and took large buy positions in currency futures. However, the Fed intervened in the foreign exchange market by immediately selling foreign currencies in exchange for dollars, causing an abrupt decline in the values of foreign currencies (as the dollar strengthened). Participants that had purchased currency futures contractsincurred large losses. One floor broker responded to the effects of the Fed's intervention by immediately selling 300 futures contracts on British pounds (with a value of about $30 million). Such actions caused even more panic on the futures market.

a) Explain why the central bank's intervention caused such panic for currency futures traders with buy positions.

b) Explain why the floor broker's willingness to sell 300 pound futures contracts at the going market rate aroused such concern. What might this action signal to other brokers?

c) Explain why speculators with short (sell) positions could benefit as a result of the central bank's intervention.

d) Some traders with buy positions may have responded immediately to the central bank's intervention by selling futures contracts. Why would some speculators with buy positions leave their positionsunchanged or even increase their positions by purchasing more futures contracts in response to the central bank's intervention?

Reference no: EM13116960

Questions Cloud

Predict college gpa using multiple regression equation : X2 is college board score (range 200-800). Use the multiple regression equation to predict college gpa for a high school gpa of 3.6 and a college board score of 600.

Information about currency derivatives : Assume that a March futures contract on Mexican pesos was available in January for $.09 per unit. Also assume that forward contracts were available for the same settlement date at a price of $.092 per peso. How could speculators capitalize on this..

What will the pressure be : A gas has a pressure of 4.82035 atm when its volume is 2.75 L. What will the pressure be when the volume is changed to 1.91015 L.

How many turns of alpha helix must be added : your hair is composedof protein known as keratins that have an alpha helix- like fibrous structure. the alpha helix-structure has approximately 3.6 amion acids per turn of of the helix and a linear dimension of 0.54nm per turn of the helix.

Question regarding currency derivatives : Explain why the floor broker's willingness to sell 300 pound futures contracts at the going market rate aroused such concern. What might this action signal to other brokers?

Choose one reading - ain’t i a woman? truth : Choose ONE reading - Ain’t I a Woman? Truth. All readings are from your textbook: Black Men and Public Spaces - Staples, Ain't I a Woman? - Truth, For Minorities Timing Is Everything - Johnson, Homeless - Quindlen, Smoking Is Good for My Business - ..

Determine the three dimensional structures of leucine : Suppose we use X-ray crystallography to determine the three dimensional structures of leucine and histidine at pH 8. This technique enables the determination of the positions of all the C, N, and O atoms in these two amino acids, but the hydrogen ..

Find the maximum weight allowed by the airline : The standard deviaiton is 2 pounds. If 15% of the suitcases are overweight, find the maximum weight allowed by the airline. Assume the variable is normally distributed.

What is the ph of a solution obtained : What is the pH of a solution obtained by adding 75.0mL of 0.366M CsOH to 250.0 ml Ba(OH)2 solution with a pH of 11.65.

User Account

All Pages