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Learning Objectives
Outline features of futures contracts
Identify futures market instruments
and participants
Understand the different types of risks
that can be hedged using futures
Overview of forward rate agreements
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Chapter Organisation
18.1 Introduction
18.2 General Principles of Hedging
Using Futures
18.3 Main Features of Futures
Transactions
18.4 Futures Market Instruments
18.5 Futures Market Participants
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18.1 Introduction
Futures contracts and FRAs are called
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Chapter Organisation
18.1 Introduction
18.2 General Principles of Hedging
Using Futures
18.3 Main Features of Futures
Transactions
18.4 Futures Market Instruments
18.5 Futures Market Participants
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Solution
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Chapter Organisation
18.1 Introduction
18.2 General Principles of Hedging
Using Futures
18.3 Main Features of Futures
Transactions
18.4 Futures Market Instruments
18.5 Futures Market Participants
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Chapter Organisation
18.1 Introduction
18.2 General Principles of Hedging
Using Futures
18.3 Main Features of Futures
Transactions
18.4 Futures Market Instruments
18.5 Futures Market Participants
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20
Is freely traded
Experiences large price fluctuations at
times
Can can be graded on a universally
accepted scale in terms of its quality
Is in plentiful supply, or cash settlement is
possible
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Commodities
Financial
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Chapter Organisation
18.1 Introduction
18.2 General Principles of Hedging
Using Futures
18.3 Main Features of Futures
Transactions
18.4 Futures Market Instruments
18.5 Futures Market Participants
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Example
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Initial basis
Final basis
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365 P
365 P
365 ( D i s ) 365 ( D ic )
(18.2)
where :
i s the FRA settlement rate expressed as a decimal
ic the contract FRA agreed rate expressed as a decimal
D the number of days in the contract period
P the contract notional principal amount.
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365 ( D i s ) 365 ( D ic )
where :
i s 0.1395 (on 19 April)
ic 0.1325 (19 September)
D 183 days (from 19 April to 19 October)
P $5 000 000.
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Settlement
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