In: Finance
1. Discuss various types of derivatives contracts: options, futures, and forward contracts.
2. How might derivative contracts come into play when purchasing products overseas and having them shipped to your business in the U.S. and vice verse?
1. a)Option gives the right and not obligation to buy or sell an
asset at a particular strike price ( the agreed price at which
transaction would take place). Options are of 2 types call and put
option. Call option gives the right to buy an underlying asset at
strike price and put option give the right to sell the underlying
asset at strike price.
b) Futures provide an obligation for buyer or seller to purchase or
sell an asset at a future date for predetermined price. These are
highly standardized and are traded on exchange. Commodities like
corns, wheat, etc. and currency can be hedged by futures
contracts.
c) Forward unlike futures is non-standardized contract but can be
customized. It is traded over the counter. It provides an option to
buy or sell a commodity or currency at fixed price in a future
date. It helps in hedging currency, price of commodity and interest
rate risk.
2) Derivative contracts help in hedging currency risk while
purchasing products or selling products abroad. By entering into
derivative contract the transaction can occur at fixed
predetermined price at a future time and this helps in overcoming
currency exchange risk.
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