Question

Compare MM hedge and forward hedge. Compare forward hedge and futures hedge. Compare options and futures. Which is easier to use? Which is riskier? Which has a higher initial cost?

Answer 1

MONEY MARKET HEDGE A money market hedge is a technique for hedging foreign exchange risk using the money market, the financial market

FORWARD MARKET HEDGE Forward market hedging is a maneuver to protect against loss in the event of a drop in or weakening of assets, interest rates or currency

OPTIONS An option contract is an agreement between a buyer and seller that gives the purchaser of the option the right to buy or sell a particular asset at a later date at an agreed upon price.

FUTURE A futures contract is a legal agreement to buy or sell a particular commodity asset, or security at a predetermined price at a specified time in the future.

Future contracts are more riskier as there is an option with the buyer to comply with the contract or not in case of option which is not the case of future. Also the maximum risk involved in case of option contract is equal to the mount of the premium involved.Also higher initial cost is involved incase of the future contract , the maximum initial capital involved incase of option contractis equalto the premium of the contract.