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  • Group 7 - Futures and Forwards Market

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    Nikhil Gupta
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    This document provides an overview of forwards and futures markets. It defines derivatives as instruments that derive their value from an underlying asset such as commodities, stocks, bonds, interest rates, and currencies. Futures contracts are standardized derivatives that are traded on exchanges, while forwards contracts are customized derivatives traded over-the-counter between two parties. The key differences between futures and forwards are that futures are exchange-traded, standardized, transparent and involve clearinghouses to mitigate counterparty risk, while forwards are over-the-counter, customized, private transactions with significant counterparty risk.

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    This document provides an overview of forwards and futures markets. It defines derivatives as instruments that derive their value from an underlying asset such as commodities, stocks, bonds, interest rates, and currencies. Futures contracts are standardized derivatives that are traded on exchanges, while forwards contracts are customized derivatives traded over-the-counter between two parties. The key differences between futures and forwards are that futures are exchange-traded, standardized, transparent and involve clearinghouses to mitigate counterparty risk, while forwards are over-the-counter, customized, private transactions with significant counterparty risk.

    Copyright:

    Attribution Non-Commercial (BY-NC)
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    Download as pptx, pdf, or txt
    40 views8 pages

    Group 7 - Futures and Forwards Market

    Uploaded by

    Nikhil Gupta
    This document provides an overview of forwards and futures markets. It defines derivatives as instruments that derive their value from an underlying asset such as commodities, stocks, bonds, interest rates, and currencies. Futures contracts are standardized derivatives that are traded on exchanges, while forwards contracts are customized derivatives traded over-the-counter between two parties. The key differences between futures and forwards are that futures are exchange-traded, standardized, transparent and involve clearinghouses to mitigate counterparty risk, while forwards are over-the-counter, customized, private transactions with significant counterparty risk.

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    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
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    of 8

    Forwards and Futures Markets

    Group 7
    Amit Bhatia Nikhil Gupta Prateek Vijay Gupta Preetish Rao Priyanshu Agrawal Radhika Bhatter 12P067 12P087 12P093 12P094 12P095 12P096

    Futures and Forwards: Derivatives Instruments


    What is a derivative
    Instruments deriving value from an underlying asset Contract entered into at present, at a predetermined price for delivery at a future date, of a predetermined quantity Asset base: Very vast, most common being commodities, stocks, bonds, interest rates and currencies Used for both hedging and speculation Futures Contract Standardized derivative traded on futures exchanges Standardized in terms of underlying asset, quantity, quality, amount, units, settlement Forwards Contract Customized derivative traded Over-the-counter (OTC) or off-exchange

    Futures Market

    Market made up of central exchanges for trading futures Contracts are standardized to provide liquidity and ease Exchange, through a clearing house, acts as counterparty to both buyers and sellers, thus ensuring safety from counterparty default risk All settlement, cash or delivery, to be done with exchange, be it buyer or seller

    Futures Market

    Margin money is required to be kept Can be electronic or open outcry based (Corn futures, Chicago Board of Trade) Popular Exchanges: Chicago Mercantile Exchange, Eurex, LIFFE, HKFE In India: NSE, BSE, MCX Most liquid markets: Treasury bills, S&P 500, Corn, Gold, Crude Oil, Forex

    Forwards Market

    A forward contract is a private, non-transferable, tailor-made agreement between a buyer and seller for the future delivery of a commodity at an agreed upon price
    Forwards contracts are traded OTC, directly between 2 parties No physical or electronic exchange/market exists for forwards contracts Forwards are bilateral contracts, leading to considerable counterparty credit risk

    Forwards Market

    No clearing house involved Forward contracts generally tend to be very large in size Forward market dominated by financial institutions, government bodies and large corporations Forwards contracts started in 1848, as a means to safeguard both rise farmers and traders interest Biggest forwards market: Financial forwards

    Futures vs Forwards
    Futures
    Standardised

    Forwards
    Customised

    Exchange traded
    Transferable Counterparty default risk negated Margin money required Highly transparent, all transactions reported

    OTC traded
    Non-transferable Significant Counterparty default risk involved Margin money not required Private transactions, lack of transparency

    Regulated markets

    Majorly unregulated

    Thank You

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