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Derivatives Futures

Snapshot of Hedgers, Speculators and

Arbitrageurs:
Heading Hedgers Speculators Arbitrageurs
Meaning: Participantswho Participants who Participants who
protect accept the risk in |take advantage of
themselves from order to increase price difference
therisk of their profits in two or more
movements in
markets in order
price to make
profits
Role: Helps in in in price
Helps Helps
transferring risk identifying Consistency and
from one person direction of the price discovery
(with low-risk futures price-
to also provides
appetite)
another (with liquidity and

Involved in:
high-risk
appetite)

risk associated
with price
|depth to the
market

|Protection against Making profits

by taking
risk
higher
from price
Making profits
by
simultaneously
movement movement two
entering in
or more markets
Least Risk-lovers Risk-free
Approach: risk-lovers|High
Intention is Reduce risk Make Make
profits profits
to: price from difference
from
movement in
prices of two
markets

1.3 FEATURES OF DERIVATIVES CONTRACT:

There are various types of Derivatives Contract:
Forward
Future

Options
Swaps
Forward Contract: A forward contract is a customized
between type of
contractual agreement two parties to
underlying asset on a specific future
buy or sell an
date at
price. Both buyers as well sellers today's pre-agreed
are bound to
honor the deal
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Vipul'M International Finance (BAF)
irrespective of the
price of underlying asset at the
contract (date of expiry date of
delivery). They are
contracts where both over-the-counter (OTC)
the parties
terms and conditions of negotiate and customize the
the contract,
stock markets. without involvement of
They may be privately dealt in
These are by two parties
relatively simpler derivatives
contract is different from cortract. Forward
spot contract. Spot' contract is an
agreement to buy or sell an asset
contract the today whereas in forward
delivery happens at a future date. One of
in forward contract the parties
takes a long
buy the underlying asset on a (buyer) position and agrees to
decided price. Whereas the specified future date,at a
pre-
other party assumes a short
position and agrees to sell the asset on the (seller)
same date for the same
price.

Example of Forward Contract: If a

his farms he could sell the corns farmer plans to grow corn in
in future for
market price is when he harvests it. whatever the
Else, he can also lock-in a
price now by getting into a forward contract that
sell his corns to ABC obligates him to
Company at a fixed price. By locking-in thhe
price now, the farmer reduces the risk of
falling prices of corn in
future. In case the
price rises, he will get only what his contract
entitles to.

Features of forward contract: Some of the features of forward

contract are as follows:
(1) Bilateral: Forward contracts are bilateral (two-sided)
a contract between two parties (without
contracts. It is
any
exchange between them). Both the parties are exposed to
counter-party risk. These two parties can be (a) A bank and a
customer (b) Two banks of same country (c) Two banks of
different countries.

(2) Counter-party risk: As these are OTC contracts, there can be

a risk of non-performance of either parties.
obligation by
These are a bit risky in nature.
(3) Customized contracts: Forward contracts are quite flexibleas
they are custom designed (not standardized). Both the parties
can negotiate the terms of the contract.