6. Forward and futures contracts A Aa The derivatives markets contain different

Question

6. Forward and futures contracts A Aa The derivatives markets contain different types of contradts. Forward contradts, futures contracts, options, and swaps are some common types of derivatives contracts. are customized agreements in which one party agrees to buy a commodity at aspecific price on a spedific future date, and the other party agrees to maite the sale. Typicaly, goods ane actually dalivwernd under these contracts. Which of the following are used to hedge against fluctuating interest rates, stock prices, and exchange rates? ates,stock prices, and exchange rates? O financial futures ?commodity futures tolbotics inc is planning to build a new production facility that wil cost sio million. tt plians to finance this projedt with 10-year bonds that would carry 7% interest rate if they were issued today However, the company does not need the money for six months which of the toilowing actions wouid hedge Tolbotics Inc egainst an increase in inberest rates? 0 Take along position in internstate futures ? Takeolong position in foreign eighangn futures O Take a short position in forsigftf exchange futums O Tbkea short position in interest tait??turww rorward and futures currency cont acts reflect anenti ation to either buy or sel currency at·future date, whereas options are contracts traded betwen buvers to buy or well a specific (undertying especfic arice caled the expiration date and sellers that ove the sotion holder the rght, but not the obligation, erose or strike price, os or before an allows you vtime ot or Sefore the expiration cate

Explanation / Answer

Forward contracts are customized agreements in which one party agrees to buy a commodity at a specific price on a specific future date......

Forward contracts are over the counter trades that generally happen at the convenience of the two parties involved. They are more customized in terms of their expiration, features, values, size. However, future contract are more uniform and are traded on exchange rates. They are non-customizable and are of fixed size and features.

Financial Futures are used to hedge against interest rates, stock prices and exchange rates. Commodity futures are used to hedge against the commodity prices.

Long Position in Interest rate Futures.The interest rate future allows the buyer and seller to lock in the price of the interest-bearing asset for a future date. Long position is looking to borrow funds at the specified rate and at a specific time. Short position is looking to lend funds at the specified rate and at a specific time.

American Option allows you to exercise the option anytime on or before expiration date. (European option is exercise-able only on the maturity date).

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