Questions On Derivatives And Derivatives

Hedging is a significant measure of financial risk management. Since the 1970s, the increasing number of powerful companies started to control the risk of the exchange rate, the interest rate and commodity by using financial derivatives. ISDA (2013) based on the Global 500 Annual Report 2012 survey found that 88 percent of companies use foreign exchange derivatives. Modigliani & Miller (1958) believed that if the financial markets were under perfect conditions, for instance, there was no agency costs, asymmetric information, taxes and transaction costs, hedging would not increase the company 's value because investors can hedge by themselves. However, a large number of practical studies have shown that hedging is beneficial

Futures are a contract or legal agreement, where an investor agrees to purchase a certain amount of a physical good or financial asset on a specific date for a set price.

10. The current price of silver is $750. Storage costs are $8 per ounce per quarter payable in advance. The interest rate is 12% p.a. with continuous compounding. Calculate the futures price of silver for delivery in six months (to two decimal places).

There are lots of methods to solve the changes in foreign currency and interest rates issue, however, derivative financial instruments are the major tunes Nike enterprise has used to tackle this issue. Despite the fact that this approach does not wipe out comprehensively the risk of foreign exchange, Nike enterprise still utilize it to minimize or delay the negative consequences. Specifically, the derivative financial instruments comprise embedded derivatives, interest rate swap, and foreign exchange forwards and options contracts (Nike annual report, 2014).

Firm Fixed Price Contracts (FFP), it is appropriate for most commercial transactions, example: Software package that can be bought for $1,500 regardless of the seller’s cost.

Derivative contracts were either negotiated with specific counterparties (over-the-counter) or were standardized contracts executed and traded on an exchange. Negotiated over-the-counter derivatives were comprised of forwards, swaps, and specialized options contracts. Over the counter derivatives can be tailored to meet the customers’ needs with respect to time and quantity and they are not traded in an organized exchange. On the other hand, standardized exchange-traded derivatives consisted of futures and options contracts. Even though over-the-counter derivatives were usually not traded like securities in an exchange, they might be terminated or assigned to an alternative counterparty. Standardized derivatives trade on an exchange and have time and quantity that are fixed.

​Futures price is defined as the price at which the two participants in a futures contract agree to transact on the settlement date (Futures Price, n.d.). If I were to go into agreement to buy shares of

The definition of "derivatives" is also very wide, and includes options and warrants, whoever they are issued by, as well as rights and interests in respect of listed securities (or other derivatives).

Analyze the derivatives market and determine the use of derivatives to efficiently manage investment risks in an investment portfolio.

The main purpose of this game is to identify and respond to the risk in the market. At the beginning of the game, as the trend in the market has not been identified, small trade size of futures was buy/sell and close off immediately after I observed that the market price is changing. As a general rule, I long futures while the futures appeared to be in in bullish market and, in contrast, short them in bearish market. When the market price on futures is on an upward trend, I long futures at market price and sell them when price has raised. In contrast, I short futures contracts at market price and buy them back while the price has dropped to a lower price than the origin price that I sold. One thing to note that there are times that while I am holding on a long

An option contract allows the option holder the right to purchase something within in a certain time period for a particular price from the seller.

Most firms hedge at least some of their risks. Hedging can take two basic forms—namely, natural hedging and hedging by means of derivative instruments. The use of derivatives as hedges has expanded greatly in recent years.

Hedging can be defined as a risk management mechanism or strategy which is used to prevent the chances of incurring losses which arise as a result of fall in prices commodities or currencies. It is a technique which is majorly used by the investors in protecting their capital against the effects of the economic situations such as inflation whereby the investors invests in the high yield financial instruments or take a position to cushion them against such effects (Investopedia, 2012).

According to Goel and Gutierrez, they investigated that fluctuating procurement price is one of the causes of inventory risk and through trading appropriate numbers of futures or forward commodity contracts reduces inventory related costs for effective hedging. Hedging and the price discovery functions of futures markets facilitates not only a better inventory management but enhances the efficiency of marketing operations, production and storage.

instruments: Cash instruments are financial instruments whose value is determined directly by markets. They can be divided into securities, which are readily transferable, and other cash instruments such as loans and deposits, where both borrower and lender have to agree on a transfer. Derivative instruments are financial instruments which derive their value from the value and characteristics of one or more underlying entities such as an asset, index, or interest rate. They can be divided into exchangetraded derivatives and over-the-counter (OTC) derivatives. Alternatively, financial instruments can be categorized by "asset class" depending on whether they are equity based (reflecting ownership of the issuing entity) or debt based (reflecting a loan the investor has made to the issuing entity). If it is debt, it can be further categorized into short term (less than one year) or long term. Foreign Exchange instruments and transactions are neither debt nor equity based and belong in their own category. A legal document such as a