Professional Documents
Culture Documents
• FORWARDS
• FUTURES
• OPTION
• SWAPS
Forward contracts..
• Agreement to buy and sell an assets on
specified date on specified price
• LONG P OS ITIO N- The party agreeing to
buy the underlying asset in the future
assumes a long position
• SHOR T PO SIT ION - the party agreeing
to sell the asset in the future assumes a
short position.
• DELIV ER Y P RIC E- The price agreed
upon is called the delivery price OR
forward price.
Feature
• Bilateral contract
• Customization not standardize
• Private agreement
• Settlement by delivery of the
product
• if party wish to reverse the contract
then he has to contract with the
same counter party which result
high price
• Weakness- centralization,
Illiquidity, counter-party risk
Futures contracts..
• Futures contracts are organised/ standar dis ed
cont ract s ( quantity, quality, time, unit of price
quotation & minimum price change, location)
• These contracts, being standardised and traded on
th e ex change s are very liquid in nature.
• In futures market, clearing cor porati on/ hous e
pr ov id es th e s ettlement guar antee .
Every futures contract is a forward contract.
As with options, almost all futures traded on
exchanges are settled by payment of their value
on the day they expire rather than by delivery of the
underlying asset.
Require margin payment
Forward / Futures
Features
Contracts
Forward Contract Futures Contract
Operational Not traded on Traded on exchange
Mechanism exchange
Contract Differ from trade to Contracts are standardised
Specifications trade. contracts.
Counterparty Risk Exists Exists, but assumed by
Clearing Corporation/
house.
Liquidation Profile Poor Liquidity as Very high Liquidity as
contracts are tailor contracts are standardised
maid contracts. contracts.
Price Discovery Poor; as markets are Better; as fragmented
fragmented. markets are brought to the
common platform.
INTEREST RATE
FUTURE
• WH AT AR E INTER EST RAT E FU TUR ES?
• Buying an interest rate futur es contract
allows the buyer of the contract to lock in a
future investment rate; not a borrowing rate as
many believe. Interest rate futures are based off
an underlying securitywhich is a debt obligation
and moves in value as interest rates change.
• When interest rates move higher, the buyer of
the futures contract will pay the seller in an
amount equal to that of the benefit received by
investing at a higher rate versus that of the rate
specified in the futures contract. Conversely,
when interest rates move lower, the seller of the
futures contract will compensate the buyer for
the lower interest rate at the time of expiration.
Option..
on aRETURN
fixedON basis.
EQUITY LESS RISKY
ASSETS
SWAP
INVESTER