Table of Derivatives and Credit Swaps Essay

Table of Derivatives and Credit Swaps Essay

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An agreement to trade an asset for cash in the future at a predetermined fixed price (Saunders & Cornett, 2011). Unlike options, futures contracts must be fulfilled regardless of a change in price in the future (Saunders & Cornett, 2011). Forward contracts are negotiated individually and the terms and conditions of the contract can differ from one contract to another (Saunders & Cornett, 2011). Forward contracts are not traded on an exchange increasing the risk associated with this type of derivative (Saunders & Cornett, 2011). A global survey by Servaes, Tamayo, and Tufano (2009) suggested forward contracts are the preferred method used by corporations in handling foreign exchange risk. Saunders and Cornett (2011) noted trading (includes trading on the spot market and forward market for foreign exchange) in foreign currency "dominates direct portfolio investments" (p. 430). A 6-month forward contract to deliver a 10-year $85 face value bond for $80 is negotiated between a buyer and seller today. In 6 months, the buyer of the contract must pay the seller $80 in return for a 10-year $85 face value bond. This contract must be fulfilled regardless if the cost of a 10-year $85 face value bond has increased or decreased in price over the 6-month period.
Similar to forward contracts, futures contracts are agreements to trade an asset for cash at a predetermined date in the future (Saunders & Cornett, 2011). However, unlike forward contracts, the value of the contract at the future date is determined through a daily marking to market (Saunders & Cornett, 2011). Additionally, the marking to market requires daily cash settlements on the value of the contract (Saunders & Cornett, 2011). Futures contracts are also traded on an excha...


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...(2011). Financial institutions management: A risk management approach (7th ed.). New York, NY: McGraw-Hill/Irwin.
Şontea, O., & Stancu, I. (2011). An Optimization of the Risk Management using Derivatives. Theoretical & Applied Economics, 18(7), 73-84. Retrieved from http://www.ectap.ro/
Servaes, H., Tamayo, A., & Tufano, P. (2009). The theory and practice of corporate risk management. Journal of Applied Corporate Finance, 21(4), 60-78. http://dx.doi.org/10.1111/j.1745-6622.2009.00250.x
Sudacevschi, M. (2010). The innovations on the financial markets. Using derivatives for banking market risk coverage. Internal Auditing & Risk Management, 20(4), 49-60. Retrieved from http://www.univath.ro/

Yung-Ming, S., & Moles, P. (2010). What motivates banks to use derivatives: Evidence from Taiwan. Journal of Derivatives, 17(4), 67-78. Retrieved from http://www.euromoneyplc.com/

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