Forwards By

& Ajinkya Yadav

(19020348002)
MBA Ex - Finance

Futures
  Derivative is a contract or a product
whose value is derived from value
Derivatives ? ? ? of some other asset known as
underlying.
  Derivatives are based on wide range
of underlying assets like,
 Metals such as Gold, Silver,
Aluminum, Zinc, Nickel, Tin, Lead,
etc.
Underlying  Energy sources such as Oil, Gas,
Assets ? ? ? Coal etc.
 Agri commodities such as Wheat,
Sugar, Coffee, Cotton, Pulses &
 Financial assets such as Shares,
Bonds & Fx.
 Participants in Derivative Markets
• Arbitrageurs take advantage of discrepancy between prices in two

Arbitrageurs different markets. Arbitrageurs keep market prices stable and reducing
possible exploitation of prices. They are typically the most experienced
market players who make fast decisions

• Speculators are high risk takers. They bet on future movements of prices
based on their skill and knowledge levels. Derivatives give them an extra

Speculators leverage, by which they can increase both the potential gain and losses.
Speculators always take calculated risks and would take the risk only if
he/she is convinced that the associated expected return is in proportion
of the risk he/she is willing to take.

Hedgers
• Hedgers use derivatives to protect (risk reduction) themselves against an
existing position they are holding. Hedging include foreign exchange
risks, hedging interest rate risk, and commodity or product input hedge.
 A Forwards contract is a contract
made today for delivery of an
assets at a prespecified time in the
future at a price agreed upon
today.
The buyer of the Forwards
Forward contract agrees to take delivery of
an underlying assets at a future
Contracts time (T) at a price agreed upon
today. No money changes hands
until time expiry. The seller agrees
to deliver the underlying asset at a
future time, at a price agreed upon
today.
 A Forwards contract is a contract
between two parties who agree to
buy/sell a specified quantity of a
financial instruments/commodities
Forward at a certain price at a certain date
in future. Forwards contracts are
Contracts not standardized contracts, they
are OTC (not traded in recognized
stock exchanges) derivatives that
are tailored to meet specific user
needs.
 Traditional agricultural or physical
Underlying Assets commodities
Currencies (Foreign exchange
of Forward forward)
Contracts Interest rates (Forward rate
agreements FRA)
 They are customized contracts
unlike futures
Tailor-made and more suited for
Why Forward certain purpose
Useful when Futures do not exist
Contracts for commodities and financial
being considered
Useful in cases futures standard
may be different from the actual
 Specifically made for particular
Tailor made purposes. Each items unique in
terms of;
Forward  Quantity
Contracts  Price
 Date
 Region to Region
 They are bilateral negotiated
contract between two parties and
hence exposed to counter party risk.
Each contract is custom designed
Features of and hence is unique in terms of
contract size, expiration date, and
Forward the asset type, quality etc.
Contracts A contract has to be settled in
delivery or cash on expiry date.
The contract price is generally not
available in the public domain.
If the party wishes to reverse the
contract, it has to compulsory go to
the same counter-party, which often
results in high prices being charged.
 No upfront fees

Advantages of Fx risk eliminated completely

Forward OTC products

Contracts
Complete hedge offering

Price protection

Simple and easy to understand

 Capital blocked no intermediate
cashflows
Disadvantages of
Forward Subject to default risk

Contracts OTC products

Difficult to cancel contracts

Difficult to find a counterparty

 A futures contract is a
standardized agreement between
the seller (short position)of the
contract and the buyer ( long
position ), traded on a futures
exchange, to buy or sell a certain
underlying instruments at a certain
Futures date in future, at a prespecified
price.
Contracts The future date is called the
delivery date or final settlement
date. The pre-set price is called the
futures price. The price of the
underlying asset on the delivery
date is called the settlement price.
 Thus, futures is a standard contract
in which the seller is obligated to
deliver a specified asset (security,
commodity or foreign exchange) to
the buyer on a specified date in
future and the buyer is obligated to
pay the seller the then prevailing
futures price upon delivery. Pricing
Futures can be based on an ‘open outcry
Contracts system’, or bids and offers can be
matched electronically.
Unlike forwards contracts, Futures
are standardized contracts traded on
exchanges through a clearing house
and avoids counter party risk through
margin money and much more.
 Futures are highly standardised
contracts that provide for
performance of contracts through
either deferred delivery of asset or
Characteristics final cash settlement.
These contracts trade on organized
Of A Futures futures exchanges with a clearing
association that acts as a middleman
Contract between the contracting parties.
Contract seller is called ‘short’ and
buyer ‘long’. Both parties pay margin
to the clearing association. This is used
as performance bond by contracting
parties.
 Margins paid are generally marked to
market price everyday;
Each Futures contract has an

Characteristics associated month that represents the

month of contract delivery or final
Of A Futures settlement. These contracts are
identified with their delivery months
Contract like July-T-Bill, December $/
derivative etc.
Every futures contract represents a
specific quantity. It is not negotiated
by the parties to the contract.
 Identified with Underlying assets

Identified with contract size

Delivery arrangements- Place of

delivery, Transfer cost

Futures Contract Identified with Delivery month

Always Are
Identified with prespecified price

Position limits

Margin requirements
Types Of Commodities Futures

Futures Contract Financial Futures

 Eurodollar

Treasury

Foreign Govt. Debt

Financial
Futures Swap

Forex

Single Stock

Index
Basis Of Difference Forwards Futures
A futures contract is a
A forward's contract is an
standardized contract, traded on a
agreement between two parties to
futures exchange, to buy or sell a
Definition buy or sell an asset (which can be
certain underlying instrument at a
of any kind) at a per-agreed future
certain date in the future, at a
point in time at a specified price.
specified price.

Customized to customers needs. Standardized, initial margin

Structure & Purpose Usually no initial payment payment required. Basic purpose is
required. Basic purpose is hedging. speculation

negotiated directly between buyer Quoted and traded on Futures

Transaction Method
and seller. exchange.

Market Regulation Not Regulated Government regulated market.

 Basis Of Difference Forwards Futures

Institutional Guarantee The contracting parties Clearing house

Risk Factor High counterparty risk Low counterparty risk

No guarantee of settlement until Both parties must deposit an initial

the date of maturity only the guarantee (margin). The value of
Guarantees forward price based on the spot the operation is marked to market
price of the underlying asset is rates with daily settlement of
paid. profit and losses.

Generally, mature on delivery of May not necessarily mature by

Contract Maturity & Expiry Date the commodity. delivery of the commodity. Expiry
Expiry depends on the transaction. is standardized.
Basis Of Difference Forwards Futures

Depending on the transaction and

Contract Size requirements of the contracting Standardized.
parties.

Market Primary & Secondary Primary

 Thanks
Ajinkya Yadav