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Financial Derivatives have been called.
..
• . . .Engines of th e Econom y. . .
Alan Greenspan
(long-time chair of the Federal Reserve)
Arbitrators:
They are in the business to take advantage of a discrepancy
between prices in two different markets. If, for example,
they see the future prices of an asset getting out of line
with the cash price, they will take offsetting positions in the
Types of Derivatives
Forwards
A Forward is an agreement between
two parties to purchase or sell an
instrument at a fixed time in the future and
at a certain price
FEATURES OF A FORWARD
CONTRACT
Forward contracts are bilateral contracts
Profi Profi
t t
ST ST
PAY OFF FROM THE
FORWARD CONTRACT
Goods Goods
Buyer (Asset) (Asset) Seller
Clearing
house Funds
(Member) (Member)
(b) Obligations with a clearing house
TYPES OF MARGIN
• Margin calls may bring the value of your margin account to original
initial margin level. Small loss allowed before margin calls.
Note that once a trader receives a
margin call, he must meet that
call, even if the price has
subsequently moved in his favor.
If no money is deposited on the day
of the margin call or early the
next morning, the commodity
broker will automatically make an
offset trade to terminate the
client’s futures position. Brokers
Example: Gold future contract size = 100 grams
Why?
• To hedge risks like floating
interest rate, Currency
fluctuations, equity returns
Example
• Interest Swaps
• Currency Swaps
• Total Return Swaps
• Equity Swaps
• Commodity Swaps
• Credit Swaps
Interest Swap
Termination:
Both parties should
agree and close or can
reassign to a third party.
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