0
A forward contract is an agreement between two parties to buy or sell an asset at a certain future time for a certain price agreed today. An option is an agreement between two parties for the option to buy or sell an asset at a certain future time for a certain price agreed today. The main difference is that a forward contract has to happen while an option may or may not happen depending on the value of the asset compared to the agreed price
Wiki User
∙ 14y ago
Wiki User
∙ 10y agoHeadging: headging means making investment some where else,to over go risk in foreign transactions.
forward exchange contracts:It means two partys go in to contract to exchange different currencys at some future date.
Add your answer:
Earn +20 pts
Concept of hedging?
The concept of hedging is to reduce the risk of financial loss. Hedging originated out of the 19th century commodity markets. A hedge can include stocks, exchange-traded funds, insurance, forward contracts, swaps, and options.
Does real cost of hedging payable with forward contract equal to nominal cost of hedging minus nominal cost of not hedging?
yes
What is a forward contract?
A customized contract between two parties to buy or sell an asset at a specified price on a future date. A forward contract can be used for hedging or speculation, although its non-standardized nature makes it particularly apt for hedging.
What are forward contracts in shares?
A forward contract is the simplest of the Derivative products. It is a mutual agreement between two parties, in which the buyer agrees to buy a quantity of an asset at a specific price from the seller at a future date. The Price of the contract does not change before delivery. These type of contracts are binding, which means both the buyer and seller must stay committed to the contract. This means they are bound to deliver or take delivery of the product on which the forward contract was agreed upon. Forwards contracts are very useful in hedging
Difference between hedging and speculation?
Hedging involves in reducing risk in order to focus on another subject, while speculating involves taking on risk in order to profit from insight.
Ask us of the following best explains what a forward contract is?
A forward contract is the simplest of the Derivative products. It is a mutual agreement between two parties, in which the buyer agrees to buy a quantity of an asset at a specific price from the seller at a future date. The Price of the contract does not change before delivery. These type of contracts are binding, which means both the buyer and seller must stay committed to the contract. This means they are bound to deliver or take delivery of the product on which the forward contract was agreed upon. Forwards contracts are very useful in hedging
What is basis risk?
Basis risk refers to the potential mismatch between the price movements of a hedging instrument and the underlying asset being hedged. It arises when there is a lack of perfect correlation between the two, leading to the risk that the hedging instrument may not fully offset the price movements of the underlying asset, resulting in financial losses. Basis risk is commonly encountered in derivative contracts and hedging strategies.
Forward market hedge?
forward market hedging is the way of making profit by predicting contract in advance to buy and sell of goods in the future.
Explain the difference between forward contracts and futures contracts?
Forwards Contract: A forward contract is the simplest of the Derivative products. It is a mutual agreement between two parties, in which the buyer agrees to buy a quantity of an asset at a specific price from the seller at a future date. The Price of the contract does not change before delivery. These type of contracts are binding, which means both the buyer and seller must stay committed to the contract. This means they are bound to deliver or take delivery of the product on which the forward contract was agreed upon. Forwards contracts are very useful in hedging Futures Contract: A futures contract is an agreement to buy or sell an asset at a certain time in the future at a specific price. The Contractual terms of the futures contracts are very clear. The Futures market was designed to solve the shortcomings in the forwards contracts. Unlike forwards, futures are traded in organized exchanges. They also use a clearing house that provides the necessary protection to both the buyer and the seller. The price of the futures contract can change prior to delivery. Hence, both participants must settle daily price changes as per the contract values. Difference: Futures are traded in Organized Exchanges while Forwards are Over-The-Counter (OTC) traded
What is the difference between insurance and hedging?
Hedging is purely speculative in nature, where in insurance Actuaries and Finance Managers (with fatty remuneration) do the job of launching new polcies as per market scenario, assessing life expectency of average inhabitants etc on a scientific basis.
How is translation exposure mitigated?
To minimise the risk of translation of foreign assets or liabilities, Futures Contracts could be undertaken. Such as Swaps OR through Hedging
Differences between a futures contract and a forward contract?
There are 3 different types of forward pricing: (1) Forward contracts (which include cash forward contracts, minimum price forward contracts and deferred pricing contracts) (2) Futures Contracts and (3) Option Contracts. A forward contract is an agreement between two parties to buy or sell an asset at an agreed future point in time. The trade date and delivery date are separated. A futures contract is a standardized forward contract that is traded on an exchange, like SAFEX. Other than forward contracts, futures contracts are not linked with specific buyers. The intermediary between buyers and sellers is a clearing house that ensures that contracts held for delivery are fulfilled. Options contract convey the right, but not the obligation, to buy (call option) or sell (put option) at a specified price during a specified period of time. The good traded in the market is not the actual commodity, but a futures contract. The farmer will receive a futures contract, which will carry an obligation to buy or sell at some specific future date, if he/she chooses to exercise the option.
