Types of Derivatives
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The paper discusses the forward contract, a futures contract and a spot contract. The paper explains how call options and hedging, both financial and non-financial, works. Finally, the paper looks at interest rate swaps, currency swaps and credit default swaps.
From the Paper:"The first type that will be examined is the forward contract. A forward contract is an obligation to sell a specific quantity of a good for a specific price at a later date. Forwards can exist for both commodities and for currencies (Financial Web, 2008). A forward contract is a private contract, therefore it is not traded on a public exchange. Typically, when a bank enters into a forward contract with a customer it is for a currency exchange. The advantages of forwards are that they are customizable. The customer is able to meet its needs directly and specifically because the terms of the forward are fully negotiable between the two parties. Some of the disadvantages of forwards are that there is no liquid secondary market for forwards. Furthermore, because the forward is a private contract between two entities, the parties are subject to counterparty risk. A firm would typically enter into a forward contract when they require a perfect hedge. A forward removes all market risk, but at a cost of low liquidity, therefore a firm would use a forward only when they had complete trust in the counterparty."
Sample of Sources Used:
- No author. (2008). Foreign Exchange: Spot Contracts. TD Commercial Banking. Retrieved December 20, 2008 from http://www.tdcommercialbanking.com/foreignx/products/spot.jsp
- No author. (2008). Forwards and Futures Contracts. Financial Web. Retrieved December 20, 2008 from http://www.finweb.com/investing/forward-and-futures-contracts.html
- Gillies, Jim. (2007). Options: The Basics. Motley Fool. Retrieved December 20, 2008 from http://www.fool.com/investing/options/2007/04/24/options-the-basics.aspx
- No author. (2008). Bond Basics: What are Interest Rate Swaps and How do they Work? PIMCO. Retrieved December 20, 2008 from http://www.pimco.com/LeftNav/Bond+Basics/2008/Interest+Rate+Swaps+Basics+1-08.htm
- No author. (2008). Cross Currency Swaps. Bank of Montreal (BMO) Capital Markets. Retrieved December 20, 2008 from http://www.bmocm.com/products/marketrisk/intrderiv/cross/default.aspx
Cite this Term Paper:
Types of Derivatives (2010, November 04) Retrieved April 07, 2020, from https://www.academon.com/term-paper/types-of-derivatives-145358/
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