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3. CURRENCY FUTURES CONTRACTS: The forward market on foreign currencies is used on a large scale.

Nevertheless, the currency futures market is quite active. In fact, currency futures were the first futures contracts not based on physical commodities. Thus, they are sometimes referred to as the first financial futures contracts , and their initial success paved the way for the later introduction of interest rate and stock index futures. Compared with forward contracts on currencies, currency futures contracts are much smaller in size. In the U.S. , these contracts trade at the CME with a small amount of trading at the New York Board of Trade. 4. INTEREST RATE FUTURES: Similar to currency futures markets, the trading in interest rate futures markets is at a relatively smaller scale than that in the interest rate forward contracts. The amount of funds involved in interest rate contracts require , more often than not, a customized agreement, which is why the need for standardized futures contracts are not as popular as their forward contracts. 3. INTEREST RATE FORWARDS:

it will owe $10. In London. This market is primarily centred in London but also exists in other parts of the world. the rate on such dollar loans is called London Interbank Offer Rate (LIBOR). The primary time deposit instrument is called the Eurodollar. by corporate for hedging. It obtains a quote from another bank PQR for a rate of 5. arbitrage and speculative activities. Thus. The FRA is an agreement between two parties which determines the interest rate that will apply to notional future loan/deposit of an agreed amount for a specified period. which are essentially short-term unsecured loans. If ABC takes the deal.0525(30/360)] =$10.000. which is a dollar deposited outside the United States. A forward rate agreement is a simple derivative which is used when an institution is exposed to a single period interest rate risk. Banks borrow dollars from other banks using Eurodollar time deposits.25%.750 in 30 days .Interest rate forwards. also known as forward rate agreements are a more common type of forward contract. It allows the forward fixing of interest rates on money market transactions.000 * [1+0. The FRA is widely used by banks and to a lesser extent.25%. the 30 day LIBOR is 5.043. The functioning of interest rate forward contracts can be demonstrated as follows: A London bank ABC needs to borrow $10 million for 30 days. There is a large global market for time deposits in various currencies issued by large creditworthy banks.

25% 5.Implications .Quoting bank (ABC BANK) NOTIONAL LENDER (SELL QUOTE) NOTIONAL BORROWER (BUY QUOTE) 5.30% NOTIONAL BORROWER (BUYER) NOTIONAL LENDER (SELLER) PQR BANK FRA Quotes.

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