A contract could be tailored on a number dimension to meet the specific needs of buyer such as average temperature, rainfall, snowfall, a heat index, or the number of heating or cooling degree days. The payoff structure could resemble a put option, a call option, a swap, or combinations of these structures. 3. Insurance Contracts This contract can be done by buying the premium of weather insurance to cover weather risk
SHIPPING DERIVATIVES (Container Freight Swap Agreement and Freight Options) Introduction Seaborne trade (a business), which carries more than 90% of all world commerce, is a volatile and risky business due to the interplay of demand and supply and it effect on freight rates. The rollercoaster nature of the business especially in respect to freight rates demand that critical attention is payed to the management of risks. In the past decades, freight rates have risen to their highest peaks and
INTRODUCTION “A derivative is like a razor, you can use it to shave and make yourself attractive for your girlfriend, you can slit your throat with it or you can use it to commit suicide.’(Anon.) This statement describes to us the problems, and on the other hand rewards, that the proper use of derivatives can bring. The derivatives market has developed responding to the uncertainty about prices, and therefore provided a means of separating out this price volatility. The tendency
Management 6 December 12, 2014 “An Analysis of Trading in Derivatives” 12 years ago, Warren Buffett warned that derivatives were “financial weapons of mass destruction” (Lenzner). 6 years after he made this statement, derivative traders helped induce the biggest financial crisis in America since the Great Depression. Derivatives are highly complex financial instruments that have fundamentally changed the way we perceive finance. Trading these derivatives has caused a financial revolution that has generated
cheapest to deliver? Explain in detail. The conversion factor, for any particular bond deliverable into a futures contract is a number by which the bond future delivery settlement price is multiplied, to arrive at the delivery price for that bond. Conversion factor relates all outstanding deliverable government bonds and notes in terms of the nominal 6% bond specified in the contract. The formula to find conversion factor is as follows: Conversion factors were developed by the CBOT in 1970's
operational hedging techniques. For example, money market, futures contracts, options and forwards contracts are commonly used by firms, as well as operational hedging techniques. All of 4 types of financial hedging techniques are short-term hedge. Money market is a part of financial markets for assets involved in short-term borrowing,lending, buying and selling. Its features are high liquidity, lower risk, such as treasury bills. Futures contracts are future transaction for buying or selling, and made
which two parties agree to exchange series cash flows at some future times according to terms stated in the agreement (Chance and Brooks 2012). They are derivatives because their value is ascertained from some other financial instrument, such as a loan or bond. Swaps are generally priced based on a notional value, which is the dol¬lar value of a contract. The most common type of swap is the interest rate swap in which the two parties agree to enter into an agreement which involve the exchange of payments
revenue. Derivatives are financial instruments used to transfer the risk associated with the variation in the underlying asset to a third party inclined at accepting that risk, but in exchange for a premium ; thus, the payoff from derivatives depends on the value of this underlying asset. Consequently, the protection or insurance paid from a certain derivative depends on the level of an index, as opposed to traditional insurance that depends on real losses. A unique type of derivatives is “Weather
1. Swap is defined as an agreement or contract between counterparties for the purpose to manage their exposure to risk. Our paper will specifically discuss about one of the commodity derivatives called as Agricultural Swap and referring to the the Agriculture Swap Contract Product (ASC) Disclosure Statement issued by Westpac Banking Corporation dated in 10 February 2016. The main purpose of entering into Agricultural Swap is to manage the exposure of the agriculture price’s movement by locking
as one of the derivatives. Investor uses option to either speculate or hedging purposes. The first significant benefits of investor using options are the ability to lock into the price of the investor desire and without the obligation to exercise the contract. The holders able to protect themselves against the possibility of fluctuation of the price towards the underlying asset which might be unfavourable to them. The investor has the option or choices whether to exercise the contract or not on or