Here are the types of futures:1. Term window2. Long-term outlook3. Transfers not available4. Flexible forward5. Closed directly forward6. Fixed advance dates7. Option Forwards Suppose XYZ Inc. receives BRL 1 million after 3 months for a sale made during the current month.
He goes to a Brazilian bank to enter into a futures contract to sell BRL 1 million after 3 months at a rate of BRL 4 for $1. As the name suggests, the accounting period of these contracts is much longer than the usual futures contracts. A standard futures contract usually has an expiration date of up to 12 months. In contrast, long-term futures contracts can have a maturity date of up to 10 years. With the exception of a longer settlement date, all other characteristics of long-term futures contracts are the same as standard futures. Since currencies make up the majority of futures, most types of futures are currency-specific. Here are the types of futures contracts: 5 Risks in futuresat closing, the price at which the future transaction will take place is fixed On the day when the exchange of goods and cash takes place, the market price may differ from the forward price: this would lead to the victory of a party and loss Futures contracts are zero-sum games, i.e. the profit for one party is equal to the loss for another party © 2011 Dorling Kindersley (India) Pvt. Ltd. This is the simplest type of futures contract.
We may also refer to these futures contracts as European contracts or standard futures contracts. These types of contracts allow investors to trade the underlying asset at a specific future time. A long-term futures transaction differs from standard futures only in terms of period. A standard futures contract usually expires in 12 months, while a long-term futures contract has a term of up to 10 years. 3 What is a futures contract? An agreement to buy or sell a particular asset at a specific time in the future at a certain price agreed at the time of entering into the contract The actual exchange of cash and assets will take place at a later date than the price at which the exchange will take place will be determined at © present 2011 Dorling Kindersley (India) Pvt. Ltd. Such a type of futures contract gives investors flexibility in exchanging funds. Or we can say that investors who use such a contract have the opportunity to exchange the funds before the settlement date. With this contact, the parties can either exchange the funds directly or make multiple payments before the settlement date. 14 How the Foreign Exchange Futures Market WorksIn India, Futures Contracts Are Offered by Banks A hedger will contact a bank authorized by the RBI and the bank will provide the forward rate rates On the settlement date, hedgers and the bank will exchange currencies at the agreed forward rate © 2011 Dorling Kindersley (India) Pvt. Ltd. XYZ Inc.
would safely receive $250,000 due to the conclusion of an NDF contract. 19 Example of appointment rate calculationLaugh = 6% and rINR = 8%. The current spot rate(s0) is 1 USD = 45.32 INR The 3-month forward rate is calculated as follows: © 2011 Dorling Kindersley (India) Pvt. Ltd. 20 Arbitrage of covered interestsAccording to the pricing of futures contracts, the forward premium ≈ the interest rate differential If this relationship is violated, there is an opportunity for arbitration and arbitration of so-called hedged interest is carried out so that the currency overvalued in terms of forward price is sold at present © 2011 Dorling Kindersley (India) Pvt. Ltd In case 1, the amount to be received by XYZ Inc. = 270,270 USD (1 million BRL / 3.7) to obtain. This is where XYZ Inc.`s cash price becomes cheap. Now the Brazilian bank pays the difference between the spot rate and the forward rate to XYZ Inc., which is $20,270 (i.e. $270,270 to $250,000). 24 Mechanisms of a forward rate agreementUnder the agreement, both parties (borrower and counterparty) to the contract agree on a future interest rate at a specified time The borrower takes at the market interest rate specified in the agreement, the so-called reference interest rate, if the actual interest rate of the loan is higher than the agreed interest rate, the counterparty pays a cash payment to the borrower If the actual loan rate is lower than the actual interest rate the borrower pays a cash payment to the counterparty The cash settlement is made at the time of borrowing © in 2011 Dorling Kindersley (India) Pvt. Ltd.
6 Reasons for futures contractsIf futures contracts may result in losses, why do traders take them? To secure the price of a future transaction to reduce future price uncertainty Future cash flows can be forecast more accurately © 2011 Dorling Kindersley (India) Pvt. Ltd. Forwards: A Primer By A.V. Vedpuriswar. Introduction In many ways, forwards are the simplest and easiest derivatives to understand. A futures contract. These types of futures are similar to flexible futures. An options futures trade allows parties to trade the underlying security at any time for a specified period of time. 2 2011 © Dorling Kindersley (India) Pvt.
Ltd.Objectives What are futures? How are futures contracts used? How are commodity futures measured? What are futures swaps? What are the uses of forward foreign exchange transactions? How are futures swaps valued? What is a forward rate contract? What are the uses of forward rate agreements? © 2011 Dorling Kindersley (India) Pvt. . . .