Weaknesses of FAS 80 and Early Derivatives Accounting

Weaknesses Of Fas 80
In 1984, Financial Accounting Standards no. 80, Accounting for Futures Contracts, also known as FAS 80 had become effective. This document
included all hedge accounting practices for entities in the United States. But FAS 80 had several faults. One of its faults was that it was bounded to
exchange–traded futures and options and not to over the counter (OTC) derivatives. In 1999, FAS 80 was replaced by Financial Accounting Standards
no.133, Accounting for derivative instruments and hedging activities. Despite, the numerous amendments, clarifications and interpretations this
document had over the years, it still remains at the core of current derivatives accounting practices. This essay tends to provide a definition of a
derivative, its characteristics ... Show more content on Helpwriting.net ...
The key distinguishing features of derivatives are: 1.Settlement in cash or equivalents – a derivative will be settled at a future date with an exchange of
cash or assets that are easily convertible to cash (such as marketable securities)
2.Underlying price and Notional amount – the total value of the derivatives will be calculated by multiplying the index by a specific number of units
specified in the contract, which is known as the notional amount (units, bushels, pounds). The value of the derivative will be based on some variable,
such as a price index, which is known as the underlying (specified price, interest rate, exchange rate).
3.No net investment – at the time the derivative contract is entered into, there will be no payment by either side in most cases. Payment occurs at the
time of settlement only. In the case of options–based derivatives, the party that is acquiring the option normally pays a premium, but this is still
considered to be no net investment as long as the payment is less than the cost of acquiring the underlying.
There are several types of derivative contracts. Three of the most common types are forwards, futures and
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TB Chapter 08
CHAPTER 8: STRUCTURE OF FORWARD AND FUTURES MARKETS
MULTIPLE CHOICE TEST QUESTIONS
1.Which of the following is a false statement related to options on futures? a.options on futures are also known as futures options b.options on futures
are also known as options on the underlying instrument c.options on futures is a derivative on a derivative d.options on futures are also known as
commodity options e.all of the above statements are true related to options on futures
2.Which of the following contract terms is not set by the futures exchange? a.the dates on which delivery can occur b.the expiration months c.the
deliverable commodities d.the size of the contract e.the price
3.Which of the following organizations ... Show more content on Helpwriting.net ...
arbitraging e.none of the above
20.The trading procedure on the floor of the futures exchange is referred to as a.against actuals b.open interest c.open outcry d.index participation
e.none of the above
21. A futures contract covers 5000 pounds with a minimum price change of $0.01 is sold for $31.60 per pound. If the initial margin is $2,525 and the
maintenance margin is $1,000, at what price would there be a margin call?
a. 31.91
b. 32.11
c. 31.29
d. 31.09
e. 31.80
22.One of the advantages of forward markets is a.performance is guaranteed by the G–30 b.trading is conducted in the evening over computers c.the
contracts are private and customized
d. trading is less costly and governed by more rules

e. none of the above
23. Which is the most active group of futures?
a. energy
b. agriculture
c. currency
d. financials
24.Options on futures have been trading since a.1973 b.1982 c.1966 d.1936 e.none of the above
25.Which of the following is not a type of futures trader?
a. scalpers
b. arbitrageurs
c. profit–takers
d. hedgers
e. day traders
26.Individuals engaging in this type of trading strategy are characterized by their attempt to profit from guessing the direction of the market
a. hedgers
b. spreaders
c. speculators
d. arbitraguers
27.This financial instrument (sometimes referred to as a commodity option) permits the holder to buy if a call, or to sell if a put, a specific underlying

Financial Risks That Are Faced By Modern Firms
In this essay I will assess the key financial risks that are faced by modern firms and illustrate the ways in which firms go about managing these risks
so that they overcome the possibility of a loss in profits. The key risks that I will analyse, will be the fluctuations in inflation, commodity price,
exchange rates and interest rates. I will then identify the key problems face by firms in managing these risks. One key risk faced by firms, is the risk in
the fluctuation of interest rates over the borrowing of sums. The fluctuation of interest rates can effect businesses due to the uncertainty of the rate of
interest increasing. The effect of changes in interest rates can depend on many factors such as; the amount that a business has borrowed and for what
period of time for, the amount of cash that a business holds and also whether the business operates in certain markets where demand is sensitive to
changes in the interest rates. The effect of fluctuating interest rate on businesses can lead to borrowing becoming expensive as a result of a high rate,
therefore it makes it much more financially difficult to receive the necessary funds needed for the business operations. One way in which these risks
of fluctuations are managed by businesses, is that they use a method of hedging called 'swaps'. Seen in figure 20.11–fundamentals of corporate finance,
it shows how two firms can use the 'swap' contract to limit and/or manage the exposure to the fluctuation of interest rates, or

What Are The Advantages And Disadvantages Of Derivatives
Derivative is a financial instrument whose value is derived from underlying asset. The underlying may be shares, commodities, indices such as NSE
and BSE sensexs and even consumer price index. In case of common stocks (shares) the investors can purchase equity derived securities representing a
claim i.e an option on a particular stock on certain index.
What is important to understand is that derivatives are not products that can be sold accordingly , they are contracts made on the basis of the value of
the actual products. This mean when the value of the assest or the product on which the derivative is based on changes, so does the value of the
derivative change. Recently , option on weather condition and ... Show more content on Helpwriting.net ...
Suppose an Investor is bullish on Reliance at the start of the current month when the spot price is Rs1000/=. He is expecting a price of Rs1150/= by
the end of expiry . Although he is expecting an upward price movement , he want to limit his downside risk and hence he buys Call option contract of
Rs1000/= (strike price) for a price of say Rs25/=(premium). By paying Rs25/= ,he gets is a right (not an obligation) to buy Reliance at any time before
the expiry at Rs1000/=, irrespective of cash market price. Hence the cost of his right is Rs1025/= and now before expiry suppose Reliance moves to
Rs1125/= he makes Rs125/= on an investment of Rs25/=. Now if Reliance moves down to Rs900/=, he will not exercise his right to buy at Rs1000/=
and his loss will not be Rs100/= but maximum of Rs25/= which is loss of very low. Thus options in a way, are like an insurance contract where by
paying certain premium, option buyer passes his risks to option

A Brief Note On Financial Derivatives
Financial Derivatives Introduction Derivatives are financial instruments whose values are derived from the values of other, more basic, entities, known
as the underlying assets. For example, the value of a stock option depends on the price of the relevant stock. Derivatives Markets In the financial
markets derivatives are traded on: п‚—Stocks п‚—Stock indices п‚—Exchange rates п‚—Interest rates п‚—Bonds п‚—Credit risk п‚—Commodities
(such as electricity, wheat, oil) [4] Derivatives are traded in two different ways – they are traded either on an exchange or over–the–counter (OTC). The
advantage of trading derivatives on an exchange is that the contracts are standardized by the exchange and credit risk is eliminated. Open–outcry
system was used... Show more content on Helpwriting.net ...
Answer: Simultaneously buying 100 shares in NY and selling them in London leads to a risk–free profit of: 100 x [($2.03 x100) – $200] = $300
(ignoring transaction costs) Can this arbitrage opportunity last for long? Futures A future is an exchange–traded contract between two parties and the
clearinghouse of a futures exchange to buy or sell a commodity whose quantity and quality are determined in the contract at a specified price on a
certain date in the future. [1] When there are alternatives about what is delivered, where it is delivered, and when it is delivered, the party with the
short position chooses. [4] The clearinghouse responsibility is to ensure for the transaction to be completed. Futures markets are organized so that the
risk of default is completely eliminated. This is possible by trading futures contracts on an organized exchange with a clearinghouse which steps in
between a buyer and a seller – this means that every trader in the futures markets has obligations only to the clearinghouse. [1] The party that has
agreed to buy the underlying asset has what is termed a long position The party that

Cfd Information
–pit trading: floor–based trading, very physical activity. –offsetting, is the same as selling a previously purchased stock or buying back a stock to close
a short position. futures contracts are fungible: any futures contract can be offset by an equivalent futures contract . Fungibility is assured by the
clearinghouse that inserts itself in the middle of each contract and, therefore, becomes the counterparty to each party. –margin: long or short position in
a futures, deposit sufficient funds in a margin account. –In the stock market, "margin" means that a loan is made. The loan enables the investor to
reduce the amount of his own money required to purchase the securities, thereby generating leverage or gearing.... Show more content on
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The U.S. government issues both instruments: Treasury notes have an original maturity of2 to 10 years, and Treasury bonds have an original
maturity of more than 10 years. Futures contracts on these instruments are very actively traded on the Chicago Board of Trade. For the most part,
there are no real differences in the contract characteristics for Treasury note and Treasury bond futures; the underlying bonds differ slightly, but the
futures contracts are qualitatively the same. We shall focus here on one of the most active instruments, the U.S. Treasury bond futures contract. The
contract is based on the delivery of a U.S. Treasury bond with any coupon but with a maturity of at least 15 years. If the deliverable bond is
callable, it cannot be callable for at least 15 years from the delivery date." These specifications mean that there are potentially a large number of
deliverable bonds, which is exactly the way the Chicago Board of Trade, the Federal Reserve, and the U.S. Treasury want it. They do not want a
potential run on a single issue that might distort prices. By having multiple deliverable issues, however, the contract must be structured with some
fairly complicated procedures to adjust for the fact that the short can deliver whatever bond he chooses from among the eligible bonds. This choice
gives the short a potentially valuable option and puts the long at a disadvantage. Moreover, it complicates pricing the contract,

End-of-Chapter Question Solutions
End–of–Chapter Question Solutions 1 ____________________________________________________________
________________________________ CHAPTER 5: FOREIGN CURRENCY DERIVATIVES 1. Options versus Futures. Explain the difference
between foreign currency options and futures and when either might be most appropriately used. An option is a contract giving the buyer the right but
not the obligation to buy or sell a given amount of foreign exchange at a fixed price for a specified time period. A future is an exchange–traded
contract calling for future delivery of a standard amount of foreign currency at a fixed time, place, and price. The essence of the difference is that an
option leaves the buyer with the choice of exercising or not exercising.... Show more content on Helpwriting.net ...
The first trade of the day was at $0.9124/i and the last trade, called "settlement," was at $0.9136/i. This closing price was 0.0027 above the previous
day's close, from which one can determine that on the previous day euro contracts closed at $0.9136/i – $0.0027/i = $0.9109/i. The closing
"settlement" price is the price used by futures exchanges to determine margin calls. Open interest is the sum of all long (buying futures) and short
(selling futures) contracts outstanding. 5. Puts and calls. What is the basic difference between a put on British pounds sterling and a call on sterling? A
put on pounds sterling is a contract giving the owner (buyer) the right but not the obligation to sell pounds sterling for dollars at the exchange rate
stated in the put. A call on pounds sterling is a contract giving the owner (buyer) the right but not the obligation to buy pounds sterling for dollars at the
exchange rate stated in the call. 6. Call contract elements. You read that exchange–traded American call options on pounds sterling having a strike price
of 1.460 and a maturity of next March are now quoted at 3.67. What does this mean if you are a potential buyer? If you buy such an option, you may
if you wish order the writer (opposite party) of the option to deliver pounds sterling to you and you will pay $1.460 for each pound. $1.460/ВЈ is called
the "strike price." You have this right (this "option") until next March, and for this right you will pay

Derivatives: Futures Contract and Hedge Fund
Plekhanov Russian Academy of Economics
International Economics
DERIVATIVE MARKETS
FUTURES, FORWARDS, OPTIONS,
SWAPS, CAPS AND FLOOR MARKETS
Prepared by: Zagorskaya Ksenia
1. OVERVIEW OF DERIVATIVE MARKET Derivatives are financial instruments whose value is derived from the value of something else. They
generally take the form of contracts under which the parties agree to payments between them based upon the value of an underlying asset or other data
at a particular point in time. The main types of derivatives are futures, forwards, options and swaps. Derivative instruments are used as financial
management tools to enhance investment returns and to manage such risks relative to interest rates, exchange rates, and financial ... Show more content
on Helpwriting.net ...
In addition to directional plays (i.e. simply betting on the direction of the underlying security), speculators can use derivatives to place bets on the
volatility of the underlying security. This technique is commonly used when speculating with traded options. Speculative trading in derivatives gained
a great deal of notoriety in 1995 when Nick Leeson, a trader at Barings Bank, made poor and unauthorized investments in index futures. Through a
combination of poor judgment on his part, lack of oversight by management, a naive regulatory environment and unfortunate outside events like the
Kobe earthquake, Leeson incurred a $1.3 billion loss that bankrupted the centuries–old financial institution.
3. TYPES OF DERIVATIVES
3.1. OTC AND EXCHANGE–TRADED Broadly speaking there are two distinct groups of derivative contracts, which are distinguished by the way
they are traded in market:
Over–the–counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an
exchange or other intermediary. Products such as swaps, forward rate agreements, and exotic options are almost always traded in this way. The OTC

derivatives market is huge.
3.2 EXCHANGE–TRADED DERIVATIVES
Exchange–traded derivatives are those derivatives products that are traded via specialized Derivatives exchanges or other exchanges. A derivatives
exchange acts as an

Advantages And Disadvantages Of Using Currency Options
Currency options is a contract which shows or grants right to buy or sell currencies at a date; however, it is not an obligation to buy or sell the
currencies in order to hedge against negative changing in exchange rates. When the option is bought on an exchange, it is done on the over the counter
market (OTC). Advantages of using currency options Euros: First, an Australian corporation can uses currency options to get right in order to hedge
its exposure in euros. Also, the listed options are regulated. Second, it can compare with future rate which provide the chance to choose the most
benefit. Third, options can be used to limit losses by hedging and to enhance the return on the portfolio. Fourth, the options are traded on an exchange
and are therefore standardized. Fifth, it allows holder or writer to spend less money and get extra income. Sixth, people can use these stock options to
copy the actual stock portfolio. Seventh, the Australian corporation can use the option which is an inexpensive way to get an investment without
obligation to purchase or sell it. Disadvantages of using currency options Euros: Holder or writer recognize that this options can also affect
performance, they might end up incorrectly in the direction and timing of stock prices and... Show more content on Helpwriting.net ...
Also, there are an excess holding amount of USD which cause supply of USD to increase over demand. Some investors may not trust and wish to
invest in US anymore due to the unstable of US politics and economics. The traders expect Donal trump would give speeches and concentrate on
economics, however, Donald Trump talk about politics and plan to have war with other countries, after his speech, it effects to the US economics which
leads US currency to depreciated against other countries including Australian

Futures Trading For Beginners : What Makes Futures...
Futures Trading for Beginners
What makes futures contracts so attractive?
Do you want to earn a stable income, but at the same time, be brave enough to take risks? Do you want to insure your assets and try your hand at
trading on financial market? Do you have good business instinct? Are you interesed in world news? In this case, it is mandatory for you to know what
is a futures contract. Futures contracts are unique invention, created to simplify the business life and make a high profit. Using futures, producers of
goods can insure their products for years to come and portfolio managers can reduce the risks specific to their profession. Any successful futures
contract has a crucial function: it meets the needs of a market.
РёРЅС„РѕРіСЂР°С„РёРєР°? ... Show more content on Helpwriting.net ...
An introduction of a central location and an improvement of the storage conditions were a step forward, but it did not solve all pricing problems.
For instance, what about Mother Nature? Severe frosts, insect infestation, drought and other natural disasters had a strong influence on the supply and
demand of agricultural products. It is does not matter if it concerns wheat market at the beginning of the twentieth century or today's futures for Apple
Inc. Fear of uncontrolled inflation and possible crisis can make the stock market panic and provoke the unpredictable consequences. Political unrest and
war can lead to trade imbalances and reduce the value of the currencies of certain countries in the global market. Anything that affects supply and
demand for a particular product, leads to price uncertainty.
How It All Started. Forwards as Forerunners of Futures
In an attempt to cope with the causes of price uncertainties, farmers and merchants began to make deals, called forward contracts. These contracts
were private talks during which they discussed and established the price for a product to be delivered in future. Thus the future price of a commodity
was established at the present time. Due to the rules, the product did not change hands until the delivery date. The solution was found. Traders could
lock the price at a certain level and did not worry about price fluctuations.
Forward

Accounting
Choose any futures exchange and elaborate on its characteristics and give a detailed description of its activities.
Introduction
Futures belong to the class of securities known as derivatives since its value is derived from the value of some other security. A futures contract is
similar to a forward contract. Noting the shortcomings of the forward market, particularly the need and the difficulty in finding a counter party, the
futures market came into existence. Futures contract is an agreement between two parties, that is a buyer and a seller, to buy or sell a particular
currency or commodity at a future date, at a particular exchange rate that is fixed or agreed upon today.
Characteristics
Futures contract is much more ... Show more content on Helpwriting.net ...
Delivery must be made at approved warehouses in the major wool selling centres throughout Australia. For wool to be deliverable, it must possess the
relevant measurement certificates issued by the Australian Wool Testing Authority (AWTA) and appraisal certificates issued by Australian Wool
Exchange Limited (AWEX). Premiums and discounts for delivery that does not match the exact specifications of the underlying contract are fixed on
the Friday prior to the last day of trading for all deliverable wools above and below the standard, quoted in cents per kilogram clean.
Example of Physical delivery
The process of physical delivery for the SFE greasy wool futures contract, it is similar for most commodity futures contract.
Suppose the greasy wool futures contract price was 700 cents at the close of trading on the expiration day. Settlement involves physical delivery, from
the seller of the futures contract to the buyer, of the underlying quantity of wool (2500 kilograms) on the business day following the expiration day.
Delivery, therefore, involves the seller delivering 2500 kg of wool to the buyer, in return for a payment of A$17,500.
Margin

Although futures contracts require no initial investment, futures exchanges require both the buyer and seller to post a security deposit known as
margin. Margin is typically set at an amount that is larger than usual

Foreign Exchange Market and Currency
(a) Using a well articulated example show how currency options can be used to manage currency risk. Graphically illustrate the payoffs of the
selected case. A. CURRENCY RISK Currency risk is the type of risk that is derived changes in the apparent value of currencies. These changes incur
a loss when the profit or the dividends of the investment are calculated from the local currency into the U.S. Dollar. "For example, suppose that a
U.S.–based investor purchases a German stock for 100 euros. While holding this bond, the euro exchange rate falls from 1.5 to 1.3 euros per U.S.
dollar. When the investor sells the bonds, he or she will realize a 13% loss upon conversion of the profits from euros to U.S. dollars." (... Show more
content on Helpwriting.net ...
It saves the owner from unpredicted fluctuations in the currency values. This tool is used worldwide in many different industries like the stock
market and shares holdings companies. This also helps maintaining the market balance to avoid other unanticipated problems in the market.
Currency options are flexible in nature as well and most of its work is over the counter and regulated properly. Moreover, it is lightly handled
therefore easy to carry out. A good example of options being used over forwards is because of uncertain variations. ". However, if we truly believe
in the expectations theory we may choose to do nothing, for example an exporter facing a weak forward rate would not use a forward or an option but
may choose to remain unhedged."( http://www.cimaglobal.com) (b) Use Chicago mercantile exchange website to review the prevailing prices of
currency futures contracts. If you purchase an Australian dollar with the closest settlement data what is the futures price?(clearly indicate the date you
have accessed the information). Is today's price different from that of the day before?. How can you explain the change in the futures price?. Given that
a contract is based on 100,000 Australian dollars, what is the USD amount you will need at the settlement date to fulfill the contract? A. "Currency
futures, also called forex futures or foreign exchange futures, are exchange–traded futures contracts to buy or sell a specified amount of a

Problem Set 2 With Answers
FIN532M: Financial Derivatives
Problem Set 2
DUE DATE: Feb. 12, 2015
1. How can you differentiate the forward price from the value of a forward contract?
(2 points)
2. Explain why an FRA can be viewed as an exchange of a floating rate of interest for a fixed rate of interest payments and how you can use FRA in
mitigating risks.
(4 points)
3. The standard deviation of monthly changes in the spot price of live cattle is 1.2 cents per pound. The standard deviation of monthly changes in the
futures price of live cattle for the closest contract is 1.4.
The correlation between the futures price and the spot price changes is 0.7. It is now Feb 5 and a beef producer is committed to purchase 200,000
pounds of live cattle on April 10. The producer ... Show more content on Helpwriting.net ...
(Portfolio) Mismatched
(Portfolio) Matching using FRA
(FRA)
Investment earning at RK
Investment earning at RK
Paying the principal at RK
Loan paying interest at RM
Loan paying interest at RM

Investing the principal at RM
3. Given:
Standard deviation (delta spot prices) = 1.2 cents/pound
Standard deviation (delta futures prices) = 1.4 cents/pound
Correlation between delta spot and delta futures prices = 0.7
1 futures contract = 40,000lbs
Purchasing requirement = 200,000 lbs
a. Optimal hedge ratio: h* = 0.7 x (1.2/1.4) = 0.6
b. Optimal number of contract:
N = 0.6 x (200,000/40,000) = 3 contracts
Since you are the one who needs to purchase the live cattle, then you should long 3 May live cattle futures contract and close out the position in April
by shorting 3 contracts.
4. Given:
Current Index : 1,200
6–month Risk–free rate: 3.5% p.a. continuous compounding
Dividend yield: 1% p.a. continuous compounding
6–month Futures Price = 1,200 x e[(3.5% – 1%) x 0.5] = 1,215.09
5. Given:
R4 = 4.2%
R5 = 4.5%
RF =?
T4 = 4
T5 = 5
T5 – T4 = 1
5th year Forward Rate (Forward rate for the periods year 4 to year 5)
RF = (R5T5 – R4T4)/(T5 – T4) = [(4.5% x 5) – (4.2% x 4)]/(5 – 4) = 5.70%
6. Given:

L = $1 million
RK = 6% p.a compounded annually
RF = 5.6% p.a. continuously compounded
R2 = 5% p.a. continuously compounded
T2 = 5
T1 = 3
You are the borrower, thus
VFRA = [L x (RF – RK) x (T2 –

International Finance
1.The modes of international trade that car markers use are export and Joint venture.
Export is the most common mode used by car markers. This mode is been carefully approached by users. Using this exporting approach it causes low
risk as automobile companies, they do not put any of their capital in jeopardy. This help to protect against any losses or prevent the loss to be
devastating. If a company is undergoing a decrease in its exporting, it can typically diminish the exporting or end the exporting business at a minimal
cost.
The second mode is joint ventures. Joint venture is a step that is mutually possessed and worked by two or more firms. Numerous firms enter the
foreign market by taking part in a joint venture with firms that ... Show more content on Helpwriting.net ...
The third strategy is option. An option contract allows the user to sell or buy currency and it helps to protect its user who uses it. Inside an option
contract it is been divided into 2 part, known as the put and call options. The user can buy or sell the currency at a certain price. The price is also
known as the strike price or exercise price. Every option has an expiry date for it.
The two appropriate strategies for the German car makers will be forward contract and option contract.
A forward contract helps save the currency risk. For example Volkswagen needed 5 million SGD to buy a product. But the company only holds
EUR therefore they need to exchange to SGD in order to buy it. However the spot rate could be low and wouldn't meet that 5 million SGD even if
they trade their EUR. This is when forward contract come in and allow to lock in the exchange rate so that they can meet the demand of 5 million
SGD which they do not have to wait for the exchange rate to meet their demand wanted. This strategy helps to save a lot of time for the company. After
the exchange rate was lock in they can then negotiate with the bank to get the money.
The next strategy is option. For example if the Volkswagen receive revenue in term of USD. The revenue they earn will be converted to EUR from
USD. However during the currency risk, EUR may strengthen. If USD is been converted to

Factors Affecting Success and Failure of Futures Contracts
By Owais Javaid Qureshi {321} MFC Batch 2010–12 Under the guidance of Dr. Nilanjan Ghosh Sr. Vice President and Head, Research and Strategy,
MCX Submitted in the partial requirements for the Degree of Masters in Finance & Control Department Of Business & Financial Studies
University Of Kashmir Certificate This is to certify that the project entitled "Factors Affecting the Success and Failure of Futures Contracts" is research
work done by Owais Javaid Qureshi, under my supervision, during March–April, 2012, submitted to the Department Of Business and Financial Studies,
University Of Kashmir in partial fulfillment for the award of the Degree of Masters in Finance & Control _____________________ Dr.... Show
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The Exchange was the fifth largest commodity exchange, among all the commodity exchanges considered in the Futures Industry Association survey,
in terms of the number of contracts traded for the six months ended June 30, 2011. MCX offers more than 40 commodities across various segments
such as bullion, ferrous and non–ferrous metals, energy, and a number of agri–commodities on its platform. Today MCX is the world's largest
exchange in Silver, the second largest in Gold, Copper and Natural Gas and the third largest in Crude Oil futures, based on the comparison of the
trading volumes of our Exchange with those of the leading global commodity futures exchanges in the world, for the calendar year 2010 and the six
months ended June 30, 2011. Background Of the study: Commodity futures have become very powerful instruments that are being used by many for
varied purposes. They provide excellent opportunities to hedgers and speculators. In this regard the exchanges have been trying to develop varied types
of products that satisfy the ever growing needs of the futures markets. Futures contracts provide a number of benefits including price discovery, volume
(liquidity), and risk transfer through hedging, to name a few. There are also indirect benefits to the economy like the creation of warehouses that store
the commodities being traded. Unfortunately, many of the futures contracts that are introduced in the futures markets do not

Ecco
Financial Derivatives Revision Sheet
Futures:
* agreements to buy or sell an asset at a future time or date * traded on exchange * standardised * choose to close out before delivery * Daily
settlement * Margins * Range of delivery dates * Virtually no credit risk
Forwards:
* agreement to buy or sell an asset at a future time or date * private agreement between two traders (clients or financial institutions) * Not
standardised * Settled at end of contract * Delivery of final cash settlement usually takes place * Usually one specified delivery date * Some credit risk
Closing out: entering into the opposite trading strategy to the original
Hedging using futures: the ... Show more content on Helpwriting.net ...
* Suggests auto and cross correlation for cash and future prices
Alternative Explanation: Efficient Markets * Stock prices change only when there is new info– cannot be predicted ahead of time * Contract to cascade
Santoni's Counter Argument * He said that selling futures when there is such a wide gap between futures and cash– portfolio schemes would not do
this * Index Future arbitrage was halted at 1.30pm, however this did not stop the sharp decline in stock prices. * Prices also collapsed in over sea
markets where programme trading was virtually non existence
Extra notes on October crash: * Cash and future prices should differ by the basis. * If index future price is under pressure in Chicago, index futures
arbitrage will lead to a massive selling in the cash market.
Call option * Gives you the right but not the obligation to buy * Long Payoff: max(St–K,0) * Short Payoff: –max(St–K,0)
Put option * Gives you the right but not the obligation to sell * Long payoff: max(K–St,0) * Short payoff: –max(K–St,0)
American option: An option that can be exercised at any time during its life
European option: An option that can only be exercised at the end of its life
In–the–money: if you could exercise immediately you would get

Put Call Parity
FDRM Project
On
9/17/2014
Estimation of NIFTY Spot
Price Using Put–Call Parity
Under the guidance of
Professor Rajiv Srivastava
Submitted by:
Abhay Sharma (1A)
Ayush Gupta (9C)
Sachin Gupta (38A)
Shikhar Mathur (45A)
Table of Contents
1.
2.
3.
4.
5.
6.

Executive Summary...................................................................................................2
Introduction ..............................................................................................................3
1.1 Why Derivative Markets....................................................................................................3
1.2 Derivative Markets.............................................................................................................3
1.3 Types of Traders..................................................................................................................5
1.4 Types of Contracts..............................................................................................................5
1.5 Development of Indian Derivatives Market....................................................................6
Objectives of the ... Show more content on Helpwriting.net ...
In developed and emerging markets, derivatives markets are used for speculation, investment and hedging price risk. Generally, derivatives markets
have low transaction cost as compared to spot markets which led more participation and should play an important role in price dissemination process.
The three important roles of derivatives products are as follows: п‚·
п‚·
п‚·
Investments – can be used for investments as well as for profit earing purposes.
Hedging – can be used to reduce spot price risk.
Price discovery – should lead the information dissemination process
1.2. About Derivatives Markets
There are various types of derivatives products traded on exchanges across the world. They range from the very simple to the most complex products.
The following are the three basic forms of derivatives:–
1.2.1 Forwards
A forwards contract is a contract between both buyer and seller of an asset which agrees to a predetermined date and price on which the contract will
be executed. The future date and price is been agreed on the date on which the contract was made. The future decided date is called as expiry date and
the pre–decided price is called forward price. Forwards contracts are private contracts which are only traded in Over the Counter (OTC) market. The
terms of the
3
contract is been decided by the parties themselves or they can be tailor made as per traders

Futures Contract and Commodity Exchange
COMMODITY MARKET [pic] INDEX |Chapter No |Topic |Page No. | |1 |Introduction to Commodity Market |04 | |2 |History of Evolution of
Commodity Markets |08 | |3 |India and the Commodity Market |10 | |4 |International Commodity Exchanges |15 | |5... Show more content on
Helpwriting.net ...
This can especially noticed in agricultural commodities where the weather plays a major role in affecting the fortunes of people involved in this
industry. The futures market has evolved to neutralize such risks through a mechanism; namely hedging. The objectives of Commodity futures:–
Hedging with the objective of transferring risk related to the possession of physical assets through any adverse moments in price. Liquidity and Price
discovery to ensure base minimum volume in trading of a commodity through market information and demand supply factors that facilitates a regular
and authentic price discovery mechanism. Maintaining buffer stock and better allocation of resources as it augments reduction in inventory
requirement and thus the exposure to risks related with price fluctuation declines. Resources can thus be diversified for investments. Price stabilization
along with balancing demand and supply position. Futures trading leads to predictability in assessing the domestic prices, which maintains stability,
thus safeguarding against any short term adverse price movements. Liquidity in Contracts of the commodities traded also ensures in maintaining the
equilibrium between demand and supply. Flexibility, certainty and transparency in purchasing commodities facilitate bank financing. Predictability in
prices of commodity would lead to stability, which in turn would eliminate the risks associated with running the

A Swiss Transnational Food And Beverage Company
1.Introduction
NestlГ© S.A. is a Swiss transnational food and beverage company. According to its annual report, this company is exposed to risk from movements
in foreign currency exchange rates, interest rate and market prices. The foreign exchange risks come from transactions and translations of foreign
operations in Swiss Francs (CHF). The interest rate risk faces the borrowings at fixed and variable rates. The market price risk comes from commodity
price and equity price. The former arises from world commodity market for the supplies of coffee, cocoa beans, sugar and others, the latter instead arises
from the fluctuations of the prices of investments held (NestlГ© annual reports, 2015). Thus, financial derivatives instruments are used by this
multinational corporation in order to hedge these risks.
Moreover, because of the huge worldwide extension of the corporation, which operates in 194 countries, the use of foreign currency derivatives to
minimize the earnings volatility would be the subject of later analysis. The report will focus on how NestlГ© uses futures and option contracts to hedge
its exposure to currency risk, centering our attention in NestlГ© Home Currency, the Swiss Franc in relation to the US Dollar (USD/CHF).
2.Currency risk: USD/CHF
The dollar has shown signs of weakness in the past few years. In 2014, the value of the dollar was lower than nowadays. Two years ago, it could be
bought an amount of $1000 by the price of

Notes On The Global Financial Crisis
w how transactions in derivative instruments can be used to either hedge risks or to open speculative positions.
1.Introduction
The latest global financial crisis, starting from the United States since 2007, has pushed the financial derivatives to be a hot spot. The publics usually
believe that the inappropriate application of derivatives should be to blame for this, which is totally wrong. It is apparent that there is no single
financial crisis resulting from only a kind of financial product. Whatever the instrument is, including credit derivatives and basic derivatives, they are
only the conducting tools holding by the real culprits. The ultimate cause of this financial crisis is the imbalance of the global economy, or in other
words, ... Show more content on Helpwriting.net ...
Unlike a spot contract, it does not exercise immediately after writing. This kind of derivatives is traded in the over–the–counter market. After entering
into contract, time passes by, price of the underlying asset may change, interest rate may change, so the market price of the forward contract most
likely will change. The market price of the forward contract is therefore variable, but the contract 's delivery price is always the same. As to a
forwards, both parties have an obligation to execute the contract at the maturity and since forwards does not require any outlay to enter, the total payoff
from the contract is exactly equal to the total profit or loss of the investor from the contract.
Most holders of forwards are usually hedgers who is facing potential risks. Since that, they want to use the forwards contracts to avoid the adverse price
movements in the future and offset the risk exposure as much as possible. However, speculators are willing to take some risks in the markets for
potential equivalent return. Usually, they use derivatives to bet on the future direction of movements in the price and mostly, their counter–party is
hedger, due to their exactly different expectations of price movements. Say a shareholder is worrying about the stock price falling so he can conduct a
short hedge to avoid unexpected movements of price with a

Derivatives 200079 Midsemester Exam
UNIVERSITY OF WESTERN SYDNEY School of Economics and Finance 200079 Derivatives INTERIM TEST (KEY) PARRAMATTA Spring
Session 2012 TIME ALLOWED: 1 hour FORMAT: 20 multiple
–choice questions WEIGHTING OF EXAMINATION: 30% SUBJECT
CO–ORDINATOR: Dr. I. Nalson SCIENTIFIC (NON–PROGRAMMABLE) CALCULATORS AND FOREIGN LANGUAGE DICTIONARIES ARE
PERMITTED NAME: ____________________________________ STUDENT NUMBER:__________________________ TUTORIAL TIME
____________________________ Instructions to candidates: THIS IS A CLOSED BOOK EXAMINATION MULTIPLE
–CHOICE QUESTIONS
NB: Indicate the answer you think is correct on the computerised sheet 1. The price... Show more content on Helpwriting.net ...
A. 8.24% B. 7.02 % C. 7.19%* D. None of the above $75er*4 = 100 er*4 = 100/75 er*4 = 1.33333333 Take logs of b.s. r4 = 0.28768207 r 0.28768207
/4 r = 0.0719205 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). A: $721.44 B: $659.43 C:
$813.12* D: None of the above F0 = (S0 + U)erT U = $8 + $8e–0.12*0.25 U = $8 + $7.763564265 F0 = ($750+ $15.76356427)e0.12*0.5 F0 =
$813.1157286 = $813.12 11. A company has a $90 million portfolio with a beta of 1.5. The S & P index is currently standing at 3000. Futures contracts
on $250 times the index can be traded. What trade is necessary to change the beta of the portfolio to one? A: Sell 60 contracts* B: Buy 75 contracts C:
Sell 90 contracts D: None of the above If B > B* short (B–B*) P/A contracts (1.5 – 1)$(90,000,000/($250*3000) = 60 12. Using the data from the
previous question, what trade is necessary to increase the beta of the portfolio to 1.8 from the original beta of 1.5 A: Sell 44 contracts B: Buy 56
contracts C: Buy 36 contracts* D: None of the above If B < B* long (B*– B) P/A contracts (1.8 – 1.5) ($90,000,000/($250*3000) = 36 13.The
three–year zero rate is 6.45% and the four–year zero rate is 7.2%

Bay Street Bankcrop Case
Bay Street Bankcrop
Case Summary:
Bay Street Bankcrop (BSB) is a highly successful and innovative minority–lending bank. The bank has just got an approval for the funding of $5
million from Fannie Mae for starting a new branch office in the inner city to extend its minority lending services to African American community.
BSB has developed an aggressive $30 million lending plan offering long term, fixed rate mortgage financing to black owned business ventures. The
plan would be financed through equity capital of $5 million for which approval has been received from Fannie Mae and an innovative savings deposit
program which would raise $25 million. BSB offers mortgage to its customers at fixed rate for long term. Offering long–term ... Show more content on
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Phase 2: BSB is raising money and will pay interest. Takeshort position (sell futures contract). If spot interest rates increase, futures interest rates will
typically also increase so that the value of the futures position will likely decrease. So we will gain from the short position in the future's market,
which would offset any loss in the cash market due to interest rate decline. Similarly, if the interest rates fall, the value of the futures contract would
increase and one will loss money from the short position in the futures market. Therefore, the gains in the spot market would be offset by the loss in the
futures market. Hence, the bank will be immunized from losses.
Phase 3: BSB is originating commercial mortgage loans and would earn interest income. Take long position (buy futures contract). Reasons for
immunization would be same as for phase 1.
3. Best Futures Contract:
The best futures contract for hedging a cash market risk exposure is one whose price sensitivity to interest rate changes is as close as possible to the
sensitivity of the cash market risk exposure to interest rate changes. The higher the correlation between the interest rate on the futures contract and the
interest rate in the spot market, the higher the immunization achieved against the losses / gains from the interest rate risk. Thus, the best futures

Cocoa
UNCTAD
COMMODITY EXCHANGES AROUND THE WORLD
By the UNCTAD Secretariat в€
—
Virtually all of the futures exchanges in the United States date from the late nineteenth or early twentieth century. They all started as commodity
exchanges, but since the early 1980s trade in financial futures has become more and more important for most of them. Until 1998, the Chicago Board of
Trade used to be the world=s largest futures exchange, but is now the second–largest place with a volume of 255 million contracts in 1999 (11 per cent
of total world volume). The Chicago Mercantile Exchange, the world=s fourth–largest, accounted for about 8.5 per cent of world volume, while the
New York Mercantile Exchange (former NYMEX and COMEX), the world=s... Show more content on Helpwriting.net ...
Most of the products traded are agricultural (with some processed products traded in a few countries), but the Government of Colombia is looking
at the possibility of introducing a commodity exchange for emeralds. The trading possibilities offered by the exchanges vary widely. Most provide a
forum for the trade in physical commodities, but some also enable forward trading; in Colombia, the exchange also trades the Acredit@ part of
warehouse receipts (in Latin America, warehouse receipts consist of two parts, one which gives rights to the commodities, and one which is used for
credit purposes). The creation of a commodity futures exchange was proposed by a major private sector group in Chile in the late 1980s; the proposed
exchange would trade in domestic food–grains and in fishmeal, but plans for it have not yet been finalised. In Paraguay, the Government considered
the possibilities for the introduction of an exchange. Progress towards the introduction of an exchange is quite advanced in the Dominican Republic; it
is planned to introduce warehouse receipt trading for beans and coffee. In Venezuela, a group already active in trading warehouse receipts
over–the–counter is also working on the creation of an exchange.
6
UNCTAD
Europe is home to both some of the world=s oldest and some of the world=s newest commodity exchanges. Two

Notes On The Price Of Wheat Futures
Strategy 1:
Concerns regarding fluctuations in the price of a certain commodity in the coming future can secured through the use of different derivative products.
In the given case, prime concern of the management of Karl's bakery is to protect itself against the future variations in the price of the wheat, as it can
impact their business in a significant way. The suitable option for the bakery is to take long position in December wheat futures contracts as the
management procures bulk of the wheat in December. It will provide Karl's management hedge against unanticipated rise in the price of wheat. The
bakery needs to purchase almost 25,000 bushels of wheat. Therefore, 5 contracts have been purchased (each contract is based on 5,000 bushels of
wheat). Price of each contract is $5.08, and total cost of this strategy stands at $127,000.
This position in closed on 27th October. The price of wheat futures has risen from $5.08 to $ 5.11 during the period. This price rise translated into
positive gains for the bakery as it indicated rise in the price of the underlying commodity. The management has remained successful in hedging its price
risk by taking long position in wheat futures.
Strategy 2:
Primary apprehension of a corn seller is decline in the price commodity which will impact his revenues negatively. Short position in corn futures will
lock in the future price of the corn and will guarantee the locked price of the commodity, irrespective of the actual market price of the

Derivatives : Financial Weapons Of Mass Destruction
CHAPTER I: INTRODUCTION During the last 30 years, derivatives have become increasingly important and widely used in the field of finance all
around the world. Their increasing values made them impossible to be ignored because they have become much bigger than the stock market when
measured in terms of underlying assets in so much that Global corporations and financial intermediaries trade billions of dollars of derivative contracts
on a daily basis across a range of products and markets (Batten and Wagner, 2012). However, some critics pointed out that "derivatives implication has
contributed in the collapses and bankruptcies of financial institutions such as Barings Bank in 1995, Long–term Capital Management in 1998, Enron in
2001, Lehman Brothers and American International Group (AIG) in 2008" (Michael Chui 2012). Even Warren Buffett argued in 2003 that
"derivatives are financial weapons of mass destruction that could harm not only their buyers and sellers, but the whole economic system"
(News.bbc.co.uk, 2003). Thus it is noticeable that opinions about derivatives are biased. Therefore, throughout this work, I will aim to investigate at
the differences between future and option contracts with a critical analysis on the evidence presented. The work will be divided into 3 parts which are
Chapter 2, chapter 3 and the conclusions. The chapter 2 will about literature review where will be discussed the definitions of futures and options
contracts as well as their differences

Venture
LECTURE 4 Investment under uncertainty, real options п‚· Derivatives valuation approach. Example: п‚§ Copper mine п‚· Strategic options.
Examples: п‚§ Copper mine with shutdown option п‚§ Valuing Vacant Land п‚§ Valuation of an option to delay п‚· Ratio comparison approach п‚·
Additional Definitions ECOM051 Business Finance, Lecture 4 (Dr Giles Spungin, G.Spungin@qmul.ac.uk, www.excalibur24.com, QMUL©2010–11)
1 Discounted cash flow methods ignore opportunities (strategic options, indirect cash flows) created by investment project. Strategic options exist
whenever management has any flexibility regarding the implementation of a project. Options to change the scale of a project (downsize, expand),
abandon it, or... Show more content on Helpwriting.net ...
Forward to buy 25k ВЈ0 Cashflow at Y1 Cashflow at Y2 25k пЂЁ p1 пЂ ВЈ0.10пЂ© 50k пЂЁ p2 пЂ ВЈ0.10пЂ© 25k пЂЁ p1 пЂ ВЈ0.65пЂ© ВЈ0
ВЈ0 50k пЂЁ p2 пЂ ВЈ0.60пЂ© ВЈ25k пЂЁ0.65–0.10пЂ© ВЈ0 ВЈ0 ВЈ50k пЂЁ0.60–0.10пЂ© 25k пЂЁ p1 пЂ ВЈ0.10пЂ© 50k пЂЁ p2 пЂ
ВЈ0.10пЂ© copper in Year 1 Forward to buy 50k ВЈ0 copper in Year 2 with ВЈ25k пЂЁ0.65–0.10пЂ© 1+0.05 maturity in Year 1 Buy ZCB with face
value ВЈ25k(0.65–0.10) with ВЈ50k пЂЁ0.60–0.10пЂ© пЂЁ1+0.06пЂ©2 maturity in Year 2 Buy ZCB with face value ВЈ50k(0.60–0.10) TOTAL
ВЈ35,345 ECOM051 Business Finance, Lecture 4 (Dr Giles Spungin, G.Spungin@qmul.ac.uk, www.excalibur24.com, QMUL©2010–11) 7 Strategic
options DEFINITION: strategic options are opportunities that arise from undertaking a project. These opportunities are usually missed in the direct
cash flow forecasts, as they are not easily identifiable. An option to delay the start of a project, or a mine with shutdown option is examples of such
strategic options. In case of the latter, we employ a binomial tree approach. Copper mine with shutdown option The mine will be closed down if the
cost of extraction is greater than copper price. EXAMPLE: Suppose that a copper mine will produce 75mln pounds of copper one year from now if
economic conditions ECOM051 Business Finance, Lecture 4 (Dr Giles Spungin, G.Spungin@qmul.ac.uk, www.excalibur24.com,

Status Quo And Goals Case Study
Status Quo and Goals As an International trade corporation, we buy goods in foreign countries and sell it to other countries for a price difference
and so to gain profit. The cost of purchasing goods in foreign countries are the majority part of our cost. The cost of purchasing goods in a foreign
would fluctuate as the exchange rate of that country fluctuate. Most of times, one country's exchange rate can be very volatile in the short term.
Sometimes it is beneficial to our profit but sometimes it can cause increasing in our cost. When the exchange rate went to the direction that we don
't want it to be, the price difference advantages we have gained from purchasing goods in foreign countries would be eroded and it would eventually
hurt our profit from selling goods in our country or other countries. So, in order to prevent the price difference we gained getting eroded from short
term or even long term exchange rate volatility, we will need a stable currency market on our back so that our revenue won't fluctuates significantly
every year. However, the currency market is the most volatile market on earth, it will never be stable. And it has come to my attention that due to the
huge fluctuation of some currencies' value, our cost of purchasing goods in some countries has been increased significantly. Moreover, I realized as a
new formed company, we don't have a very matured hedging strategy to offset our currency exposure, also cost of strategy we currently implemented in

Future Contract Essay
Futures contract
In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a
price agreed today (the futures price or the strike price) but with delivery occurring at a specified future date, the delivery date. The contracts are traded
on a futures exchange. The party agreeing to buy the underlying asset in the future, the "buyer" of the contract, is said to be "long", and the party
agreeing to sell the asset in the future, the "seller" of the contract, is said to be "short". The terminology reflects the expectations of the parties –– the
buyer hopes the asset price is going to increase, while the seller hopes for a decrease. Note that the contract ... Show more content on Helpwriting.net ...
* The delivery month. * The last trading date. * Other details such as the commodity tick, the minimum permissible price fluctuation.
Margin
To minimize credit risk to the exchange, traders must post a margin or a performance bond, typically 5%–15% of the contract's value.
To minimize counterparty risk to traders, trades executed on regulated futures exchanges are guaranteed by a clearing house. The clearing house
becomes the buyer to each seller, and the seller to each buyer, so that in the event of a counterparty default the clearer assumes the risk of loss. This
enables traders to transact without performing due diligence on their counterparty.
Margin requirements are waived or reduced in some cases for hedgers who have physical ownership of the covered commodity or spread traders who
have offsetting contracts balancing the position.
Clearing margin are financial safeguards to ensure that companies or corporations perform on their customers' open futures and options contracts.
Clearing margins are distinct from customer margins that individual buyers and sellers of futures and options contracts are required to deposit with
brokers.
Customer margin Within the futures industry, financial guarantees required of both buyers and sellers of futures contracts and sellers of options
contracts to ensure fulfillment of contract obligations. Futures Commission Merchants are

Fundamentals of Futures and Options Markets 7e
http://helpyoustudy.info CHAPTER 1 Introduction Practice Questions Problem 1.8. Suppose you own 5,000 shares that are worth $25 each. How
can put options be used to provide you with insurance against a decline in the value of your holding over the next four months? You should buy 50
put option contracts (each on 100 shares) with a strike price of $25 and an expiration date in four months. If at the end of four months the stock
price proves to be less than $25, you can exercise the options and sell the shares for $25 each. Problem 1.9. A stock when it is first issued provides
funds for a company. Is the same true of an exchangetraded stock option? Discuss. An exchange–traded stock option provides no funds for the
company. It is a... Show more content on Helpwriting.net ...
The profit as a function of the stock price is shown in Figure S1.1. Figure S1.1 Profit from long position in Problem 1.13 Problem 1.14. Suppose
that a June put option on a stock with a strike price of $60 costs $4 and is held until June. Under what circumstances will the holder of the option
make a gain? Under what circumstances will the option be exercised? Draw a diagram showing how the profit on a short position in the option
depends on the stock price at the maturity of the option. http://helpyoustudy.info The seller of the option will lose if the price of the stock is below
$56.00 in June. (This ignores the time value of money.) The option will be exercised if the price of the stock is below $60.00 in June. The profit
as a function of the stock price is shown in Figure S1.2. Figure S1.2 Profit from short position In Problem 1.1 Problem 1.15. It is May and a trader
writes a September call option with a strike price of $20. The stock price is $18, and the option price is $2. Describe the investor's cash flows if the
option is held until September and the stock price is $25 at this time. The trader has an inflow of $2 in May and an outflow of $5 in September. The
$2 is the cash received from the sale of the option. The $5 is the result of the option being exercised. The investor has to buy the stock for $25 in
September and sell it to the purchaser of the option for $20. Problem 1.16. An investor writes a

Southwest Jet Fuel Hedge
Case Assignment 1: Southwest Jet Fuel Hedge 1) The estimate of expected fuel consumption for year 2008 is 1511000000 gallons. We assume that
the fuel consumption is uniform across months. Then the estimated fuel consumption for 2008Q1 will be 1511000000/4=377750000 gallons. Since
we need to hedge 75% of the expected fuel consumption over 2008Q1, the amount of fuel we need to hedge over 2008Q1 will be
75%Г—377750000=283312500 gallons, 283312500/3=94437500 gallons each month. Because the crude oil futures contracts trade in units of 1000
U.S. barrels (42000 gallons), the total number of contract we need to enter will be 283312500 gallons/42000 gallons= 6745.5 We have three contracts
(Feb.08, Mar.08, Apr.08) available. Our... Show more content on Helpwriting.net ...
(4) The standard deviation of changes in jet fuel price is: 0.2554 The standard deviation of changes in April 08 futures prices is: 6.8109 The covariance
of the above two is: 1.6704 So the correlation is: 1.6704/(6.8109Г—0.2554)= 0.9603, not 1. The correlation between jet fuel prices and oil futures is
not 1, because the changes of jet fuel are not exactly the same with the changes of crude oil. After all, they are different products. Another reason is
the jet fuel prices in the excel file is the spot price, while the price for oil futures is future price. The changes of spot price are not exactly the same
with the changes of future price. (5) If the similar strategy is used for the next 6 months from June 30th, the P&L of the hedging strategy between June
30th and September 22nd can be calculated as follows. Aug.08 contract P&Lпјљ The P&L of the future is (127.95–140.00)/42= –0.2869$/gallon So the
P&L of the total future is 94437500Г—(–0.2869)=–27094000$. The Jet fuel price that Southwest would implicitly pay is:
125920000Г—3.81+27094000=479755200+13787875= 506849200$ The actual price is 125920000Г—3.81=479755200$ The hedge is not beneficial.
Sep.08 contract P&L: The P&L of the future is (114.98–140.58)/42= –0.6095$/gallon So the P&L of the total future is 94437500Г—(–0.6095)=
–57560000$ The Jet fuel price that Southwest would implicitly pay is:

Notes On Stock Index Future Contracts
In the example outlined above, the portfolio gained a substantial amount of profit in the previous nine months, and one way to secure this position
would be to sell all the shares in the portfolio and hold the proceeds in cash with relatively stable rate of interest 0.75% for three months. Alternatively,
the portfolio can be hedged against future possible outcome of the falling market. Stock index future contracts are commonly used to hedge market risk
of a diversified, actively managed portfolio for a period of time and produce a positive return even in falling market. A fund manager, who believes
that there is a possibility that the market is going to fall, can enter a short position in stock index future in order to hedge the portfolio. The portfolio
outlined above comprises only 15 shares of the FTSE100 index, exact future hedging would be impossible, as only index futures contracts exist.
Nevertheless, a beta of 1 indicates that the expected return on this portfolio will be perfectly correlated to the expected return on indexed portfolio,
and an effective result can be achieved by cross–hedging.
In order to make a decision whether to choose the cash, or index futures alternatives is necessary to compare the costs of both transactions. The main
advantage in entering index future contracts instead of selling stocks and buying them back later at a lower price is transaction costs. Transaction costs
for establishing and liquidating index futures are much lower than what

Log and Hedging
The data sources for historical spot and futures prices on crude oil and refined products are available at http://www.eia.gov/petroleum/data.cfm (click
on "Prices"), and current oil futures price data are available at http://www.cmegroup.com/trading/energy/. While much of the basic ideas surrounding
these projects come from Chapter 10 of the textbook, class discussions will involve deeper coverage than that posed in the textbook. I will be looking
for evidence in your reports that you have been paying attention in class. Failure to provide such evidence will result in lower or possibly failing
grades on the written report.
Description of assignment:
Underlying information for assignment:
The basic scenario: You work for a... Show more content on Helpwriting.net ...
You need to keep these records yourself, but do not despair if you do not want to track settlement prices daily! Historical data on crude oilfutures
contract settlement prices are updated weekly at http://www.eia.gov/dnav/pet/pet_pri_fut_s1_d.htm. Through February 22, the March 2016 contract is
"Contract 1" on the EIA website.
In early March, your boss expects you to submit a written report containing the following components.
Required elements for written report:
Write a report (5 pages maximum, double–spaced...note that any data exhibits do not count toward the 5–page maximum) for the VP of VUL Air
containing the following elements (PLEASE NOTE: Your instructor is NOT your audience, so be careful about your assumptions regarding your
reader's knowledge base). Your paper will be assessed based on the following factors: 1) correctness of content, 2) completeness of elements below, 3)
rigor of analyses and creative judgment employed in designing analyses, and 4) effectiveness of communication (including professionalism):
Facts associated with implementation (Approximate weighting = 25%): Documentation of futures contracts liquidated (date, quantity,

Essay about Corporation Finance Final Exam Spring 2014
1.What are conversion factors? Why were conversion factors developed? How do they impact on which bond is cheapest to deliver? Under what
conditions would there be no cheapest to deliver? Explain in detail. The conversion factor, for any particular bond deliverable into a futures contract
is a number by which the bond future delivery settlement price is multiplied, to arrive at the delivery price for that bond. Conversion factor relates all
outstanding deliverable government bonds and notes in terms of the nominal 6% bond specified in the contract. The formula to find conversion factor
is as follows: Conversion factors were developed by the CBOT in 1970's and was intended to compensate for the coupon and timing differences of...
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It is the ratio of futures position relative to the spot position that minimizes the variance of the position. We can calculate the optimal hedge by
multiplying the correlation between futures and spot with standard deviation of spot divided by the standard deviation of the future. 0.66 = future
contract/ (200,000/100) Future contract = 1320 short contract. 5. Compare and contrast selling Eurodollar futures and being a fixed rate payer in a
swap as a risk management technique. Explain in detail. Eurodollar futures are based off deposits of US dollars that are held within foreign banks or
foreign branches. The yield on these contracts are usually baded off the London Interbank Offer Rate of LIBOR. At the time of settlement, the
contracts are marked to the cash settlement price which is calculated as 100– the 90 day LIBOR rate. If we were to take out a loan with a variable rate,
we could sell Eurodollar futures to lock in our interest payments. If interest rates were to rise, we would have to pay more to the bank we took the
loan out from but would make up all the difference from the gains on the Eurodollar contract. Another way to mitigate interest rate risk from a variable
rate loan would be to enter into a interest rate swap agreement. Unlike Eurobond futures, interest rate swaps are less standardized and are traded on the
OTC market. The transfer of interest payments is also slightly different than Eurobond futures. If interest

Essay on Ostrich Meat Future Contract
Future contract #1 Ostrich meat 1. This is a future contract of 60,000 lbs. ostrich meat traded in $0.0001/lb. in Dec., Mar., Jul. and Sep. The seller has
to deliver USDA frozen 75–100 pound Grade A ostrich carcasses. The daily Price cannot be $0.05/lb. above or below the previous day's settlement
price. 2. i) According to world – ostrich organization (http://www.world–ostrich.org/demand.htm), the current demand for ostrich meat is way far more
than supply. Therefore, there will be a constantly increase in the price of ostrich meat. Investors are reluctant to take short positions of ostrich meat
futures; however, there would be a lot of people willing to take long positions. Thus, the long positions will be in far excess of short... Show more
It is too large for retailers of ostrich meat. ii) As the ostrich meat is not a popular kind of meat, the traded market has not enough liquidity, creating wide
bid/ask spreads and excessive volatility. Only really expert on ostrich meat will trade on the contract. iii) The delivery method is particularly important
for commodities that involve significant transportation costs. However, the delivery method in the contract is not mentioned and may cause confusion.
5. We recommend that the contract not be accepted based on the point (2–4). I) the ostrich meat is not a popular kind of meat; the traded market has not
enough liquidity, creating wide bid/ask spreads and excessive volatility. There will be few potential investors. To improve this we recommend
changing the underlying asset into a common kind of meat like pork and beef. II) The delivery method in the contract is not specific and may
cause confusion. To improve this contract, it needs to include detailed method of delivery. Future contract #2 Credit Card Receivables Security
Future Contract 1. This is a contract from credit card receivables securitization, a kind of bonds finance collateralized by credit card receivables.
Every Contract of security has a face value at maturity of $100,000 and will mature in 2.5 to 5 years. The price of the contract changes by 1/32 a
point but cannot be 3 points above or below the previous day's

Essay on Harvard Business Case: Options
Question 1: What is the theoretical price of the MMI March '86 futures contract? To calculate the theoretical price of the MMI March '86 futures
contract, we applied the formula: F(t,T) = S(t) * Exp(r(T–t) – y) Here, we assume 23 days from February 26 to March 21 and used 23 days as "t to T".
We used dividend yield (3.41/1374.5 = 0.25%) as y, the cash index $311.74 as S(t), and one month treasury 6.8% as r. According to our calculation,
the theoretical price will be $ 312.30. Question 2: Assume that Jim is subject to a $5,000,000 position limit. What position should he take to exploit
the mispricing for the March '86 MMI futures? In order to decide which position Jim should take to earn a profit, we have to compare the... Show more
To calculate the return at T, several calculations have to be performed. The following formula is applied to calculate the future value of the loan taken,
in other words, what Jim has to buy back at T: гЂ–FVгЂ—_l (T)=гЂ–PVгЂ—_l (t)e^r(T–t) with гЂ–PVгЂ—_l (t) = $4,999,516.42 (90% of totally
used money), rl = 8%, and T–t = 23/365. This results in гЂ–FVгЂ—_l (T) $5,024,783.10 which Jim has to pay back to the bank. The same formula
can be applied to calculate the expected future value of the own funds with гЂ–FVгЂ—_o (T) = $502,478.31 (it also assumes r = 8% interest). The
underlying stock which Jim bought at t can be sold for S(T) at March 21st. As Jim bought the underlying he will also receive dividends worth
$12,371.48. With regard to the short futures, Jim has to buy shares at S(T) which he then can sell at a price of $5,016,800.00 (see Figure 2). Question
3: What rate of return can Jim expect to earn on his position? As shown by Figure 2, the total return from these transactions will be $1861.72. Based on
the input of own funds, the total annualized return on that transaction would be 6.076%. Figure 3 shows in addition the return on the overall employed
funds. Question 4: Who, in addition to security dealers, would you expect to engage in index–futures arbitrage? Besides dealers, following people
engage in index future arbitrage for a variety of reasons: Speculators Institutional Investors High frequency traders Investors that have the

Futures Contract and Spot Rate
PART I. MULTIPLE CHOICE QUESTIONS 1. When the value of the British pound changes from $1.50 to $1.25, then the pound has _________ and
the dollar has _________. a. appreciated; appreciated b. depreciated; appreciated c. appreciated; depreciated d. depreciated; depreciated 2. When the
exchange rate changes from 1.0 euros to the dollar to 0.8 euros to the dollar, then the euro has _________ and the dollar has _________. a.
appreciated; appreciated b. depreciated; appreciated c. appreciated; depreciated d. depreciated; depreciated 3. If the dollar _________ from 1.2 euros
per dollar to 0.8 euros per dollar, the euro _________ from 0.83 dollars to 1.25... Show more content on Helpwriting.net ...
a. involve the immediate exchange of bank deposits. b. involve the exchange of bank deposits as some specified future date. c. involve the immediate
exchange of imports and exports. d. none of the above. 15. Most mutual funds are structured in two ways. The most common structure is a(n)
_________ fund, from which shares can be redeemed at any time at a price that is tied to the asset value of the fund. A(n) _________ fund has a fixed
number of nonredeemable shares that are traded in the over–the–counter market. a. closed–end; open–end b. open–end; closed–end c. no–load; load d.
load; no–load 16. A deferred–load mutual fund charges a commission _________. a. when shares are purchased. b. when shares are sold. c. both
when shares are purchased and when they are sold. d. when shares are redeemed. 17. Late trading is the practice of allowing orders received
_________ to trade at the _________ net asset value. a. before 4:00 pm; 4:00 pm b. after 4:00 pm; 4:00 pm c. after 4:00 pm; next day 's d. before
4:00 pm; previous day 's 18. ______ means the investors can convert their investment into cash quickly at a low cost. a. Liquidity intermediation b.
Denomination intermediation c. Diversification d. Managerial expertise 19. Government bonds are essentially

Derivatives Study Guide
1. Both forward and futures contracts are traded on exchanges. : False
2. Futures contracts are standardized; forward contracts are not. : True
3. The S&P500 index futures contract is a physical delivery contract. The pork bellies futures contract is a cash–settled contract. : False
4. An American option can be exercised at any time during its life. : True
5. A put option will always be exercised at maturity if the strike price is greater than the underlying asset price. : True
6. The fact that the exchange is the counter–party to every futures contract issued is important because it eliminates interest rate risk. : False
7. Index arbitrage is a strategy which exploits differences between actual index
futures ... Show more content on Helpwriting.net ...
ration
A call option gives the owner the right but not the obligation to buy the underlying asset at a predetermined price during a predetermined time period
Strike (or exercise) price: the amount paid by the option buyer for the asset if he/she decides to exercise
Exercise: the act of paying the strike price to buy the asset
Expiration: the date by which the option must be exercised or become worthless
Exercise style: specifies when the option can be exercised
п‚® European–style: can be exercised only at expiration date
п‚® American–style: can be exercised at any time before expiration
п‚® Bermudan–style: can be exercised during specified periods
Payoff/Profit of a Purchased Call
Payoff = Max [0, spot price at expiration – strike price]
Profit = Payoff – future value of option premium
Payoff/profit of a purchased (i.e., long) put
п‚® Payoff = max [0, strike price – spot price at expiration]
п‚® Profit = Payoff – future value of option premium
Put–Call Parity
The net cost of buying the index using options must equal the net cost of buying the index using a forward contract
Call (K, t) – Put (K, t) = PV (F0,t – K)
п‚® Call (K, t) and Put (K, t) denote the premiums of options with strike price K and time t until expiration, and PV (F0,t ) is the present value of the

forward price
Synthetic security creation using parity
п‚® Synthetic stock: buy call, sell put, lend PV of strike and dividends
п‚® Synthetic T–bill: buy stock, sell call, buy put

Acct 613 Essay
Internet Based Tax Briefing 1 – Haig Simmons Aqeel A Sahibzada,
University of Maryland University College
ACCT 613/9040 – Professor Bruce McClain
October 14, 2012
Subject: Haig Simmons – Loss recognition on anthracite coal future contracts, capital or ordinary loss
Facts
Taxpayer Haig Simmons operates an in home coal heating and delivery service for consumer uses in Baltimore and Anne Arundel counties. Due to the
instability of coal resources and prices, Haig Simmons enters into certain futures contract purchases in order to ensure a steady supply of coal for
customers at a fixed rate. Simmons sole purpose of entering into futures contracts is to protect against price fluctuations with no profitable intentions.
As a ... Show more content on Helpwriting.net ...
29.
Analysis
Internal Revenue Code section 1221 defines "capital asset" as "property held by the taxpayer (whether or not connected with his trade or business),
but does not include (1) Stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the
taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his
trade or business." As defined, Haig Simmons' anthracite coal home heating and delivery service business holds anthracite coal in the ordinary
course of business and therefore, is not considered a capital asset. Section 64 defines ordinary income as income earned from providing services or
the sale of goods (inventory) "which is not a capital asset." Based on this definition, any asset that does not classify as a capital asset is an ordinary
asset. Since Haig Simmons was providing home coal heating services for consumers, any inventory kept was for the purpose of maintaining a steady,
stable, and regular supply of coal and not held as a long term asset for future sale gains.
Based on the 1988 Supreme Court case of Corn Product Refining Co. v. Commissioner (350 U.S. 46; 76 S.Ct. 20; 100 L.Ed. 29), hedging transactions
were determined to be used to support business practices of certain commodities. Such hedging transactions are normal for businesses engaged in
commodity sales such as coal or corn to protect against market

Weaknesses of FAS 80 and Early Derivatives Accounting

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