Sumaiya Akter Sristy

Id: 19-39715-1
Sec: A
Quiz: 1
1.What is derivative 
Ans: A derivative is a security with a price that is dependent upon or derived from one or
more underlying assets. The derivative itself is a contract between two or more
parties based upon the asset or assets. 

2.what is currency derivatives  

Ans: Currency derivatives are exchange based futures and options contracts that allow one to
hedge against currency movements. Currency DerivativesA currency derivative is a contract with
a price that is par-tially derived from the value of the underlying currency that it represents.
Three types: of currency derivatives that are often used by MNCs are forward contracts,
currencyfutures contracts, and currency options contracts. Each of these currency derivativeswill
be explained in turn.

1.2 differences between forward contract [otc maket] and future contracts

Ans: Forward Contracts In some cases, an MNC may prefer to lock in an exchange rateat which
it can obtain a currency in the future. Aforward contractis an agreementbetween an MNC and a
foreign exchange dealer that specifies the currencies tobe exchanged, the exchange rate, and the
date at which the transaction will occur. Theforward rateis the exchange rate, specified in the
forward contract, at which the curren-cies will be exchanged. Multinational corporations
commonly request forward contractsto hedge future payments that they expect to make or
receive in a foreign currency.In this way, they do not have to worry about fluctuations in the spot
rate until the timeof their future payments.
Currency Futures ContractsFutures contracts are similar to forward contractsbut are sold on an
exchange instead of over the counter. Acurrency futures contractspecifies a standard volume of a
particular currency to be exchanged on a specific settle-ment date. Some MNCs involved in
international trade use the currency futures marketsto hedge their positions. Thefutures rateis the
exchange rate at which one can purchaseor sell a specified currency on the settlement date in
accordance with the futures con-tract. Thus, the futures rate’s role in a futures contract is
analogous to the forwardrate’s role in a forward contract.

 
1.3 differences between call options [right to buy] and put option [right to sell] 
Ans: Buying a call option gives the holder the right to own the security at a predetermined price,
known as the option exercise price. Conversely, buying a put option gives the owner the right to
sell the underlying security at the option exercise piece.Currency options contracts can be
classified as callsor puts. Acurrency call optionprovides the right to buy a specific currency at a
specificprice (called thestrike priceorexercise price) within a specific period of time. It is used
tohedge future payables. Acurrency put optionprovides the right to sell a specific currencyat a
specific price within a specific period of time. It is used to hedge future receivables.Currency call
and put options can be purchased on an exchange.