Derivatives examples

• Example of a Forward Contract

• Suppose you are a farmer and you want to sell wheat at the
current rate of Rs. 18, but you know that wheat prices will fall
in the coming months ahead. In this case, you enter a contract
with a grocery for selling them a particular amount of wheat at
Rs. 18 in three months
• What is a Currency Forward?
• A currency forward is a customized, written contract
between parties that sets a fixed foreign currency exchange
rate for a transaction that will occur on a specified future
date. The future date for which the currency exchange rate is
fixed is usually the date on which the two parties plan to
conclude a buy/sell transaction of goods.
• For example, assume that Company A in the United States wants to contract for a future
purchase /sale of machine parts from/to Company B, which is located in India.
• Therefore, changes in the exchange rate between the US dollar and the euro may affect
the actual price of the purchase – either up or down.
The price at which US company will sell to India is
100000 dollars
Delivery after 3 months

The current exchange rate is 79 re for one dollar hence the price of machine is 7900000 Rs
If dollar rate is 82 after 3 months the company B has to pay 8200000 incurring loss of
300000 Rs
If the rate is 77 B makes a profit of Rs 200000
B does not want to take any risk
• The importer in India and the exporter in the US agree upon an
exchange rate of 79 rs  for 1 USD that will govern the transaction
that is to take place 3 months from the date the currency forward
contract is made between them. At the time of the agreement, the
current exchange rate is 79 Rs dollars per 1 dollar.
• If, in the interim and by the time of the actual transaction date, the
market exchange rate is 82 rs per US dollar , then the buyer will
have benefited by locking in the rate of 79 On the other hand, if
the prevailing currency exchange rate at that time is 77Rs the
importer will not get any benefit but he has hedged himself
• Suppose it is the other way round please caculate
• Mr x runs a small foundry and needs copper for meeting a clients
order for delivery after 2 months
• He needs 10000 kilos there is a strong rumour that due to war
escalation copper prices might rise 10%
• His costing and quote to his client is as per todays price which is Rs
643.7 per kilo
• What can he do
• A has 2000 reliance shares price of shares are Rs2580 he wants to to
sell these shares for daughters marriage 3 months hence he wants Rs
2580 per share advise A
• You are looking for a house in Mumbai you find a seller who is willing
to sell at rs 1 crore but you still want to look at other houses without
losing this deal you may get a similar house at less then 1 crore use
this example to explain options