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Derivative Forward Agreement

Door adminSkinss | In Geen categorie | on september 17, 2021

If a tourist goes to Times Square in New York, he will probably find a bureau de change that will abandon the exchange rates of the foreign currency per US dollar. This type of convention is often used. It is known as an indirect quote and is probably the way most retail investors think in terms of exchanging money. However, to perform financial analyses, institutional investors use the direct quotation method, which indicates the number of units of the national currency per unit of foreign currency. This process was established by analysts in the securities industry, as institutional investors tend to think about how much national currency is needed to buy a unit of a given stock instead of how many shares can be bought with a unit of national currency. Under one of these standards, the direct offer is used to explain how a futures contract can be used to implement a hedging interest arbitrage strategy. Allaz and Vila (1993) propose that there is also a strategic reason (in an imperfect competitive environment) for the existence of futures trading, i.e. that futures trading can also be used in a world without uncertainty. This is explained by the fact that companies are encouraged by Stackelberg to anticipate their production through futures contracts. Due to the lack of transparency related to the use of futures contracts, some potential problems may arise. For example, parties who use futures contracts are at risk of default, their trading can be problematic due to the lack of a formalized clearing house, and they are potentially exposed to significant losses if the derivatives contract is poorly structured. As a result, there is a risk that serious financial problems in the futures markets will be transferred from the parties that carry out such transactions to the company as a whole. If S t {displaystyle S_{t} the spot price of an asset at time t {displaystyle t} and r {displaystyle r} is the continuous composite rate, then the futures price must be at some point T {displaystyle T} F t , T = S t e r ( T − t ) {displaystyle F_{t,T}= S_{t}e^ {r (T-t)}} Compared to futures markets, it is very difficult to close your position, that is, to lift the futures contract.

For example, while they are in the long term, the conclusion of another forward contract may cancel the delivery commitments, but increase the credit risk, since three parties are now involved. The conclusion of a contract almost always involves contact with the counterparty. [10] the continuous risk-free return and T is the maturity period. The intuition behind this result is that if you want to own the asset at time T, there should be no difference between buying the asset today and maintaining and buying the futures contract and delivery in a perfect capital market. Therefore, both approaches must cost the same value in present value. You can find proof of arbitration as to why this is the case in rational pricing below….

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