Forwards and futures are contracts where two parties to the contract, the buyer and the seller. agrees to the future delivery price for a specified quality and quantity of an asset or commodity at the time and date the contract is entered into. The delivery of the underlying asset will take place at a pre-determined future date. Forwards A Forward contract may be defined as an agreement to purchase at a future date a given asset at a price agreed today. It may also be defined as “abilateral agreement between two parties to buy or sell an asset or a commodity of specified quantity and quality at a future date on a mutually agreed delivery price”. The contract or agreement can be between two financial institutions, a financial institution …show more content…
Over the Counter Contract: Trading in forward contracts is not available on stock exchanges. These are Over the Counter (OTC) Contracts. Forward contracts are privately negotiated between two parties. One of such parties is usually a financial institution or bank. 2. Non-standardized contracts: Forward contracts are non-standardised, that is. they are customised according to the requirements of parties to the contract. The terms of the contract like the amount of the underlying asset, expiration or due date etc. are unique or customised or negotiated for each and every contract depending upon the requirements of the parties involved in the contract or agreement. 3. Counterparty Credit Risk: All parties in a forward contractwould be exposed to counterparty credit risk. This is the risk that the other party may not honour or make delivery as per the contract. Since forward contracts are not registered on any stock exchange, the risk that the other party may default is …show more content…
Similarly, the case of a short forward contract for selling the underlying asset is Payoff (short) = K – S, where S = Spot price on the date of delivery and K = delivery price or the forward price agreed under the forward contract Let us assume that the spot price at the end of 6 months i.e. 30 June 2016 is 67.00 and the forward price to sell USD INR is at ` 66.7350. The payoff would be calculated as below: Payoff (short) = 66.7350 (Forward price) - 67.00 = -0.2650 In this case the holder of the forward contract makes a loss of 0.2650 per USD as he would have received more INR if he had sold in the spot market @ 67.00 whereas he received only 66.7350 under the forward contract for selling USD. The positive or negative payoffs show the notional profit or loss that is generated by the holder of the contract. A profit of one party generates equivalent loss to the other party as there is no cost of entering into a forward contract. Value of a Forward
The four elements of a contract are the agreement, the consideration, contractual capacity, and a legal object. The oral agreement between Sam and the chain store satisfies the agreement element of a contract definition because when the chain store offered to sell Sam 's invention at their stores, Sam accepted by agreeing to ship 1000 units in exchange. The second element of a contract, the “consideration of each party,” is satisfied because Sam and the chain store have something to give the other (1000 units of the invention in exchange for the exclusive sales of the product at their stores). The third element is “contractual capacity,” which may or may not be fulfilled since we do not know Sam 's age or whether
Caterpillar Inc. also faces the risk of its cash flow and earnings being affected by fluctuations in the exchange rates of currency, commodity prices, and interest rates. To control for this, the company’s Risk Management Policy ensures prudent management of interest rates, commodity prices, and exchange rates of foreign currency by allowing the use of derivative financial instruments. According to the policy, the derivative financial instruments are not supposed to be used for the purpose of speculation. In its pricing strategy, Caterpillar Inc. faces the risk of difficult shipping of its products. This risk can be encountered by offering its products on instalments and lease to its loyal customers (Caterpillar, Inc. (CAT), 2011).
...ises for each period. This diagram assumes a positive contango. Exhibit 9 however assumes negative contango, and as we can see this leads to a lower profit for each period. Since the contract does not have a permanent delivery date, then the company does not promise to deliver gold for any one particular year. Therefore there is little risk that the company hedges more gold than is deliverable using this strategy. American Barrick was able to negotiate agreements giving them a 10-year maturity. If the company were to rollover up until maturity and the spot price at that time is greater than the forward price than they could miss out on a very high price rise. However, the company is able to lessen large amounts of opportunity costs by using the SDC and the chance of missing out on a high price at the year of maturity may very well be counterbalanced by this fact.
A contract is an agreement that can be enforced in court and is formed by two or more parties who agree to perform or to refrain from performing some act now or in the future (Miller, Cross, and Jentz 289). In other words, it is a set of legal promises between two or more people or businesses. Contract law includes the elements of a contract, genuineness of assent, fraud, duty to disclose, disaffirmance and good faith. In order for a contract to be valid, there are essential elements that it must have. These elements include: an agreement, consideration, legality, and capacity.
(Potential $loss if reduce price = 94962.yr but losing market would be a bigger problem.)
On the other hand, if the IDR/CNY exchange rate follows the forward rate quotes, the profitability of China would increase because the rupiah will be discounted against the yuan. When looking at the return on sales, they show that in the next five years, the profit of Noah would be high because the company will benefit from the rupiah that will be greatly discounted against the yuan. For instance, by 2015, the Indonesia rupiah would be approximately 2050 to 1 Chinese yuan.
The expanding global market has created both staggering wealth for some and the promise of it for others. Business is more competitive than ever before, and every business, financial or product-based, regardless of size or international presence is obligated to operate as efficiently as possible. A major factor in that efficient operation is to take advantage of every opportunity to maximize profits. Many multinational organizations have used derivatives for years in financial risk management activities. These same actions that can protect multinational organizations against interest rate futures and currency fluctuations can be used to create profits for those same organizations.
In conclusion, hedging risk with financial derivatives can give firm range of benefits such as lower probability of having financial distress, lower value of debt ratio, and earn tax benefit. It can be concluded that firm should hedge risk using financial derivatives because lot evidence shows that firm using this strategy is more successful than those who are not. However, since different type of companies facing different risks, they should not necessarily use the same hedging strategy.
The exclusion clause is an important device for allocating the risks between the contractual parties. However, the exclusion clauses could mostly be found in written contracts, especially standard form of contracts. Standard form contracts with consumers are often contained in some printed ticket, or delivery note, or receipt, or similar document. In practice, it is very common that if a person wants the product, he may have no alternative but to accept the terms drawn up by the other party even though such terms are disadvantage to him, or he may simply accept it regardless the possible unfavorable position because he does not trouble to read a long list of terms and conditions. Therefore, contracts are regularly signed, tickets are simply accepted, or a tick-box on a website is clicked, commonly between large companies and individual consumers.
Since the rates are going to fluctuate, it is easy to imagine that the party, to whom the contract means a worse result than what the spot rate on the day of settlement will offer, will have a strong incentive to renege. Futures contracts solves this by use of two mechanisms, the first being that parties are required to post collateral, also called a margin, which serves as a guarantee that the parties can meet their obligations. The second mechanism is the daily settlement. Instead of waiting until the date of delivery, gains and losses are settled and exchanged every day through a process called ‘marking to market’ (Berk and DeMarzo, 2013). This means that cash changes hands every day, provided that the price of the contract
of USD, it would need to put more weight in long futures contracts as much as they believe in by
Since the listing of KOSPI 200 futures in May 1996, the derivatives market has grown into one of the key derivatives markets in the world. In the meantime, the market has achieved a higher level of excellence in market operation and secured a trading system and fair market management, and consequently figures as a decent reference among derivatives markets. The brief history of Korean derivatives market related to the products is as follows:
A contract is an agreement between two parties in which one party agrees to perform some actions in return of some consideration. These promises are legally binding. The contract can be for exchange of goods, services, property and so on. A contract can be oral as well as written and also it can be part oral and part written but it is useful to have written contract otherwise issues can be created in future. But both the written as well as oral contract is legally enforceable. Also if there is a breach of contract, there are certain remedies for that which are discussed later in the assignment. There are certain elements which need to be present in a contract. These elements are discussed in the detail in the assignment. (Clarke,
...ting in hedging activities in the financial futures market companies are able to reduce the future risk of rising interest rates. By participating in the financial futures market companies are able to trade financial instruments now for a future date (Block & Hirt, 2005).
A contract is generally considered to be an exchange of promises or an agreement between parties which in due course legally binds the parties; this can be enforced by the English Law. A contract is always, referred to the basic foundations of Contract Law, which refers to promises being kept amongst two parties. It is clear that all people make contracts nowadays and do not even consider for a moment that they are forming contracts; these can be formal or informal, oral or written.