Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. define forward and futures contracts and explain h

Define forward and futures contracts and explain how they may be used in hedging and speculation. Explain,...

60.1K

Verified Solution

Question

Finance

Define forward and futures contracts and explain howthey may be used in hedging and speculation.

Explain, using numerical examples, the settlement mechanisms offorward and futures contracts and discuss how these are likely toaffect the probability of, and loss from default.

Answer & Explanation Solved by verified expert
4.4 Ratings (672 Votes)
Hedging refers to taking offsetting position in two separate but related financial instruments such that the impact of the risk factor is mitigated or eliminated A very simple example is Say a company completes a delivery today but payment will be received in a foreign currency a month later but based on exchange rate today A company should immediately hedge this position by entering into a transaction where payment by it has to be made in the same foreign currency a month later but based on exchange rate today If this happens the company receives payments in the foreign currency a month later and pays out the same amount in the second transaction thus without incurring any gains losses due to exchange rate fluctuation Hedging can be natural or intellectual man made A natural hedge is by taking offsetting positions in two securities For example Buying shares of India Cements and shorting selling shares of another cement company say J K cement A natural hedge is a method of reducing risk by investing in two different items whose performance tends to cancel each other A natural hedge does not involve the use of sophisticated financial tools such as derivatives or futures contracts Its a natural hedge Gain in one will offset the loss in other Insurance is a natural hedge An artificial hedge is by taking the offsetting position in derivative market by making use of options futures forwards or even swaps Hedging can be used to manage risks arising due to fluctuations in prices interest rate or foreign exchange rates Commonly used instruments are future contracts options Call and Put option on the stock of two different companies operating in same sector sale and purchase of rights to goods and services for delivery at different dates Uses Derivatives are used for the following Hedge or mitigate risk in the    See Answer
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Zin AI - Your personal assistant for all your inquiries!
Become a Member

Transcribed Image Text

Define forward and futures contracts and explain howthey may be used in hedging and speculation.Explain, using numerical examples, the settlement mechanisms offorward and futures contracts and discuss how these are likely toaffect the probability of, and loss from default.

Other questions asked by students

Q

1. Prokaryotic (Bacterial) Cell -Organelle Cell Function ½. Ribosome: Nucleoid Region: Plasma Membrane: 2. Eukaryotic (Animal and Plant) Cell--Organelle Cell Function  ...

Biology
Q

In a few words: What is the purpose of the production process?

General Management
Q

III How adaptations become common in a population Morgan s sphinx moth or Xanthopan morganii...

Biology
Q

Nuclear reactions that occur in the Sun release atremendous amount of energy. Which statementbest describes...

Physics
Q

1 A wave is represented by y A sin Bt Cx where A amplitude B...

Physics
Q

What is the volume of a sphere with a radius of 12 units OA 144...

Geometry
Q

Fifty four wild bears were anesthetized and then their weights and chest sizes were measured...

Statistics
Q

60 For what value of x does the graph of f x e 2x have...

Calculus
Q

12.5 The annual accounting date of Lawston plc is 31 May. The following...

Accounting
Q

The Cat Lady is a new business you started this year. When your customers are...

Accounting
Q

X Company is considering replacing one of its machines in order to save operating costs....

Accounting
Q

Boca Inc. Balance Sheets December 31 Assets Cash Accounts Receivable Inventory Prepaid Expenses Long-term Investments...

Accounting