Category Archives: DERIVATIVES MANAGING FINANCIAL RISK

Payoff for Futures

Payoff for Futures A payoff is the likely profit loss that would accrue to a market participant with change in the price of the underlying asset. Futures contracts have linear payoffs. In simple words, it means that the losses as well as profits, for the buyer and the seller of futures contracts, are unlimited. The payoff for futures, that is, for buyers (long futures) and sellers (short futures) is discussed be

Futures Terminology

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FUTURES CONTRACTS

FUTURES CONTRACTS Futures markets are designed to solve the problems that exist in forward markets. A future contracts agreement between two parties to buy or sell an asset at a certain time in future at a certain price. But unlike forward contracts, futures contracts are standardized and exchange traded. To facilitate liquidity in the futures contracts, the exchange specifies standard features for the contract.

Limitations of Forward Contracts

Limitations of Forward Contracts Forward markets are afflicted by several problems: (i) Lack of centralization of trading, (ii) Liquidation and (iii) Counterparts risk. The basic problem in the first two is that they have too much flexibility and generality. The forward market is like a real estate market in that any two consenting can form contracts against each other. This often makes them design terms of the dea

FORWARD CONTRACTS

FORWARD CONTRACTS A forward contract is an agreement to buy or sell an asset on specified date for a specified price. One of the parties to the contract assumes a long position and agrees to buy the underlying asset on ascertain specified future date, for a certain specified price. The other party assumes a short position and agrees to sell the asset on the same date for the same price. Other contract details l

DERIVATIVES MANAGING FINANCIAL RISK

DERIVATIVES MANAGING FINANCIAL RISK INTRODUCTION This Chapter describes derivatives. Derivative instruments are defined by the Securities Contracts (Regulation) Act to include (1) a security derived from a debt instrument, share, secured unsecured risk instrument or contract for differences, or any other form of security and (2) a contract derives its value from the prices index of prices of underlying securiti