International business unit7
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This document discusses currency options. It defines a currency option as a financial derivative that gives the buyer the right to buy or sell a currency at a specified exchange rate during a specified period of time. There are two types of currency options: put options, which give the right to sell one currency and receive another, and call options, which give the right to buy one currency with another. Currency options provide advantages like limiting risk to the premium paid and allowing profits from favorable exchange rate movements, but they also have disadvantages like losing the full premium if the option expires out of the money or is terminated early.
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DIFFERENCE BETWEEN CASH MARKET AND DERIVATIVES MARKET.A cash market is a marketplace for the immediate settlement of transactions involving commodities and securities.
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This document discusses various techniques for managing foreign exchange risk in Forex dealings. It outlines short-term and long-term risks and how businessmen can manage risks and make profits. Some key risk management techniques discussed include hedging using forwards, money markets, rollover contracts, currency futures, options, and swaps. Forwards involve buying/selling a currency at a fixed future date. Money markets and rollover contracts help cover exposed positions. Currency futures and options provide tools to hedge currency risk. Currency swaps exchange one currency for another at pre-set terms.
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This document discusses currency derivatives markets. It explains how forward contracts, currency futures contracts, and currency options contracts work and how multinational corporations and speculators use them to hedge against or speculate on anticipated exchange rate movements. Forward contracts allow corporations to lock in exchange rates for future currency needs. Currency futures contracts are traded on exchanges and standardized, while options provide the right but not obligation to buy or sell a currency at a set price.
Derivatives - Classroom Presentation
The document summarizes the history and types of derivatives in India. It discusses:
- Futures trading began in India in 1875 through the Bombay Cotton trade association. The government later banned some derivatives until 1995-1999 when regulations were amended.
- Derivatives include futures, forwards, swaps, and options, whose values are derived from underlying assets. Common underlying assets include commodities, currencies, interest rates and stocks.
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This document provides an overview of currency derivatives, including forward contracts, futures contracts, and options contracts. It explains how these instruments work and how they can be used by multinational corporations and speculators to hedge currency risk or speculate on anticipated exchange rate movements. Forward contracts lock in an exchange rate for a future date, while futures contracts standardize the amount and settlement date. Options contracts provide the right but not obligation to buy or sell a currency at a set price. These derivatives allow risk from currency fluctuations to be transferred between parties.
Derivatives and Hedging | Finance
Derivative is a financial instrument that derives its value from the value of some underlying asset. When the prices of commodities, currencies, securities, and interest rate are not fixed and keep on fluctuating, it becomes very necessary to hedge. Copy the link given below and paste it in new browser window to get more information on Derivatives and Hedging:- http://www.transtutors.com/homework-help/finance/derivaties-and-hedging.aspx
Exposure transaction
This document discusses foreign currency exposure and risk management for multinational companies. It defines transaction exposure as the risk from adverse currency movements between when a transaction is budgeted and when the exposure is extinguished. Transaction exposure is short-term and impacts cash flow. The document discusses various hedging instruments for transaction exposure like forward contracts, futures contracts, options, and money market hedges. It provides examples of how companies can use these instruments to hedge currency risk from imports and exports.
All about futures and options
The derivatives market worth more than $516 trillion is experiencing a period of unwinding as worried investors pull out their cash. Several banks have reported major losses in the hundreds of millions to over a billion dollars from equity and currency derivatives. The unwinding or "Great Unwind" is a result of investors selecting higher risk investments in hopes of profiting from anticipated price movements but facing extraordinary losses when prices moved against them.
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DIFFERENCE BETWEEN CASH MARKET AND DERIVATIVES MARKET
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Forex risk management techniques
This document discusses various techniques for managing foreign exchange risk in Forex dealings. It outlines short-term and long-term risks and how businessmen can manage risks and make profits. Some key risk management techniques discussed include hedging using forwards, money markets, rollover contracts, currency futures, options, and swaps. Forwards involve buying/selling a currency at a fixed future date. Money markets and rollover contracts help cover exposed positions. Currency futures and options provide tools to hedge currency risk. Currency swaps exchange one currency for another at pre-set terms.
Currency derivatives
This document discusses currency derivatives markets. It explains how forward contracts, currency futures contracts, and currency options contracts work and how multinational corporations and speculators use them to hedge against or speculate on anticipated exchange rate movements. Forward contracts allow corporations to lock in exchange rates for future currency needs. Currency futures contracts are traded on exchanges and standardized, while options provide the right but not obligation to buy or sell a currency at a set price.
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The document summarizes the history and types of derivatives in India. It discusses:
- Futures trading began in India in 1875 through the Bombay Cotton trade association. The government later banned some derivatives until 1995-1999 when regulations were amended.
- Derivatives include futures, forwards, swaps, and options, whose values are derived from underlying assets. Common underlying assets include commodities, currencies, interest rates and stocks.
- The main purpose of derivatives is to transfer risk from one party to another through hedging. This allows farmers, for example, to guarantee prices and encourage investment.
Basic05
This document provides an overview of currency derivatives, including forward contracts, futures contracts, and options contracts. It explains how these instruments work and how they can be used by multinational corporations and speculators to hedge currency risk or speculate on anticipated exchange rate movements. Forward contracts lock in an exchange rate for a future date, while futures contracts standardize the amount and settlement date. Options contracts provide the right but not obligation to buy or sell a currency at a set price. These derivatives allow risk from currency fluctuations to be transferred between parties.
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Derivative is a financial instrument that derives its value from the value of some underlying asset. When the prices of commodities, currencies, securities, and interest rate are not fixed and keep on fluctuating, it becomes very necessary to hedge. Copy the link given below and paste it in new browser window to get more information on Derivatives and Hedging:- http://www.transtutors.com/homework-help/finance/derivaties-and-hedging.aspx
Exposure transaction
This document discusses foreign currency exposure and risk management for multinational companies. It defines transaction exposure as the risk from adverse currency movements between when a transaction is budgeted and when the exposure is extinguished. Transaction exposure is short-term and impacts cash flow. The document discusses various hedging instruments for transaction exposure like forward contracts, futures contracts, options, and money market hedges. It provides examples of how companies can use these instruments to hedge currency risk from imports and exports.
All about futures and options
The derivatives market worth more than $516 trillion is experiencing a period of unwinding as worried investors pull out their cash. Several banks have reported major losses in the hundreds of millions to over a billion dollars from equity and currency derivatives. The unwinding or "Great Unwind" is a result of investors selecting higher risk investments in hopes of profiting from anticipated price movements but facing extraordinary losses when prices moved against them.
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Derivatives are financial instruments whose value is based on an underlying asset such as stocks, bonds, currencies, or commodities. There are two main types of derivative markets - the exchange traded market where instruments like futures are traded, and the over-the-counter market where forwards, swaps, and options are privately negotiated. Derivatives are used by financial and non-financial firms to hedge risks and increase returns, but there are also concerns that their misuse could destabilize markets, especially if major participants in the over-the-counter interest rate or currency swap markets fail.
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Derivatives
This document provides an overview of various types of financial derivatives, including futures, forwards, options, and swaps. It defines derivatives as financial instruments whose value is derived from an underlying security such as a commodity, stock, bond, or other derivative. The document explains the obligations associated with each type of derivative contract and discusses how they can be used for hedging risk or speculative purposes. It also outlines some key concepts for understanding derivatives markets.
5
This chapter discusses how currency derivatives like forward contracts, futures, and options are used for hedging and speculation based on anticipated exchange rate movements. Forward contracts allow corporations to lock in exchange rates for future currency needs. Currency futures contracts are standardized and traded on exchanges, while options provide the right but not obligation to buy or sell a currency. Both futures and options allow hedging of currency risk and speculation based on exchange rate expectations. The use of these derivatives can increase the value of a multinational corporation by reducing exposure to fluctuating exchange rates.
Forward & swap
1) Derivatives are financial contracts whose value is dependent on an underlying asset. Forwards and swaps are two common types of derivatives.
2) A forward contract involves an agreement between two parties to exchange an asset at a predetermined price on a future date. Swaps involve an exchange of cash flows between two parties according to a prearranged formula.
3) Common types of swaps include currency swaps, where cash flows of different currencies are exchanged, and interest rate swaps, where interest payments of fixed and floating rates are exchanged. Derivatives allow parties to hedge risks and access rates in currencies they do not have direct access to.
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This chapter discusses long-term financing options for multinational corporations (MNCs), including issuing bonds denominated in foreign currencies. It explains that MNCs must forecast exchange rates and interest rates to evaluate the costs and risks of foreign currency financing. The chapter also covers how MNCs can use techniques like hedging with currency swaps or interest rate swaps to reduce exchange rate and interest rate risks from long-term financing denominated in foreign currencies.
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The document discusses various methods for hedging interest rate risk and currency exposure using financial instruments like futures contracts. It provides examples of how companies can use futures contracts on Eurodollar deposits and Treasury bills to hedge transaction exposure from lending, borrowing, and currency fluctuations. By taking positions in these futures contracts, companies can lock in interest rates and protect themselves if rates move adversely in the future.
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The document discusses derivatives, including their growth and types. It provides examples of how derivatives like futures, forwards, options, and swaps work and how they can be used for hedging and speculation. The key types of derivatives are over-the-counter derivatives, which are privately negotiated between two parties, and exchange-traded derivatives, which are traded on organized exchanges.
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Importance of derivatives in risk management
Derivatives are contracts whose value is based on an underlying asset. Common types include forwards, futures, options, and swaps. Forwards and swaps are bilateral contracts while futures are exchange-traded. Options provide the right but not obligation to buy or sell an asset. Derivatives help manage various types of risk, including systematic risks like market risk and interest rate risk, as well as unsystematic risks like business and financial risk. They improve price discovery, enhance market liquidity, and allow flexible risk management strategies like hedging.
Currency derivatives
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Currency futures
The document discusses various foreign exchange derivatives, including currency forwards, futures, options, and swaps. It notes that currency futures were first introduced on the NSE in 2008 on the USD-INR pair, and later expanded to other currency pairs. Currency options were introduced in 2010. The key features and differences between currency forwards, futures, and options are summarized. Futures are traded on exchanges, have standardized contracts, and involve clearing houses and margin requirements. Forwards involve customized over-the-counter contracts between two parties. Options give the buyer the right but not obligation to buy or sell currencies at a future date at a strike price.
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This document discusses hedging instruments for managing foreign exchange risk. It begins by defining foreign exchange exposure and classifying it into three categories: transaction exposure, translation exposure, and economic exposure. The document then discusses techniques for managing exposure, including forwards, futures, options, swaps, and combinations of these derivatives. It provides details on forwards contracts, interest rate swaps, currency swaps, and how premiums and discounts are calculated for forwards. The purpose is to explain common hedging instruments used to reduce foreign exchange risk.
Forward contracts (1)
Forward contracts allow parties to lock in an exchange rate for buying or selling an asset at a future date. There are several types of forward contracts including currency forwards. Currency forwards are used by importers, exporters, investors and borrowers to hedge against currency risk. Forward rates are determined based on interest rate differentials between currencies under the principle of covered interest rate parity.
Interest Rate Derivatives
This document discusses interest rate derivatives, which are financial instruments derived from underlying interest rates or cash markets. Some popular types of interest rate derivatives are futures, forwards, options, and swaps. Interest rate derivatives allow investors to adjust portfolio positions more quickly and cheaply than transacting in the underlying instruments. They also provide more liquidity. Specifically, the document defines interest rate futures, swaps, caps, and floors, and discusses the markets for exchange-traded versus over-the-counter interest rate derivatives.
9.kalpesh arvind shah.subject international banking and foreign exchange risk
This document discusses hedging instruments for managing foreign exchange risk. It begins by defining foreign exchange exposure and classifying it into three categories: transaction exposure, translation exposure, and economic exposure. The document then discusses techniques for managing exposure, including forwards, futures, options, swaps, and combinations. It provides details on derivatives, focusing on forwards-based derivatives like forward contracts, swaps, and futures contracts. Specific types of swaps like interest rate swaps and currency swaps are explained.
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Foreign Exchange (Fx) Derivatives
The document provides an overview of using foreign exchange (FX) derivatives, specifically FX swaps and outright forwards, for credit unions. It defines these derivatives and explains how they can be used to boost income or reduce borrowing costs. Key risks like default risk and re-pricing risk are discussed along with steps for risk management like setting policy amendments, internal accounting practices, and regulatory reporting requirements. Usage of FX derivatives must be approved by the regulator in writing with appropriate risk management controls.
Financial derivative
The document discusses various derivatives contracts including forwards, futures, options, swaps, and their key characteristics. A forward contract involves a customized, over-the-counter agreement to buy or sell an asset at a future date for a predetermined price. A future is a standardized forward contract traded on an exchange. Options provide the right but not obligation to buy or sell an asset. Swaps involve exchanging cash flows of different assets or currencies to hedge risks.
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Derivatives & risk management
Derivatives are financial instruments whose value is based on an underlying asset such as stocks, bonds, currencies, or commodities. There are two main types of derivative markets - the exchange traded market where instruments like futures are traded, and the over-the-counter market where forwards, swaps, and options are privately negotiated. Derivatives are used by financial and non-financial firms to hedge risks and increase returns, but there are also concerns that their misuse could destabilize markets, especially if major participants in the over-the-counter interest rate or currency swap markets fail.
Foreign exchange risk and exposure
Foreign exchange risk and exposure refer to how changes in exchange rates can affect the value of a firm's assets, liabilities, and profits. Exposure is the sensitivity of a firm's value to exchange rate changes, while risk is the variability of a firm's value due to uncertain exchange rate changes. There are three main types of exposures - transaction, translation, and economic. Firms can use hedging strategies like forward contracts and options to manage their foreign exchange risk and exposure by locking in exchange rates for future transactions.
Exchange Rate Risk Hedging By Indian Companies
This document discusses exchange rate risk hedging techniques used by Indian companies. It describes various internal hedging techniques like exposure netting and external techniques like forwards, futures, and options. It then discusses some exotic options like barrier options and Asian options. The document analyzes some cases where Indian companies like Ranbaxy, Biocon, and HDFC Bank faced losses due to unfavorable currency movements despite hedging, sometimes due to using complex exotic options improperly. It emphasizes the need for prudent hedging strategies to manage risk.
Derivatives
This document provides an overview of various types of financial derivatives, including futures, forwards, options, and swaps. It defines derivatives as financial instruments whose value is derived from an underlying security such as a commodity, stock, bond, or other derivative. The document explains the obligations associated with each type of derivative contract and discusses how they can be used for hedging risk or speculative purposes. It also outlines some key concepts for understanding derivatives markets.
5
This chapter discusses how currency derivatives like forward contracts, futures, and options are used for hedging and speculation based on anticipated exchange rate movements. Forward contracts allow corporations to lock in exchange rates for future currency needs. Currency futures contracts are standardized and traded on exchanges, while options provide the right but not obligation to buy or sell a currency. Both futures and options allow hedging of currency risk and speculation based on exchange rate expectations. The use of these derivatives can increase the value of a multinational corporation by reducing exposure to fluctuating exchange rates.
Forward & swap
1) Derivatives are financial contracts whose value is dependent on an underlying asset. Forwards and swaps are two common types of derivatives.
2) A forward contract involves an agreement between two parties to exchange an asset at a predetermined price on a future date. Swaps involve an exchange of cash flows between two parties according to a prearranged formula.
3) Common types of swaps include currency swaps, where cash flows of different currencies are exchanged, and interest rate swaps, where interest payments of fixed and floating rates are exchanged. Derivatives allow parties to hedge risks and access rates in currencies they do not have direct access to.
Basic18
This chapter discusses long-term financing options for multinational corporations (MNCs), including issuing bonds denominated in foreign currencies. It explains that MNCs must forecast exchange rates and interest rates to evaluate the costs and risks of foreign currency financing. The chapter also covers how MNCs can use techniques like hedging with currency swaps or interest rate swaps to reduce exchange rate and interest rate risks from long-term financing denominated in foreign currencies.
hedging risk and exposure
The document discusses various methods for hedging interest rate risk and currency exposure using financial instruments like futures contracts. It provides examples of how companies can use futures contracts on Eurodollar deposits and Treasury bills to hedge transaction exposure from lending, borrowing, and currency fluctuations. By taking positions in these futures contracts, companies can lock in interest rates and protect themselves if rates move adversely in the future.
001 Financial Derivatives
The document discusses derivatives, including their growth and types. It provides examples of how derivatives like futures, forwards, options, and swaps work and how they can be used for hedging and speculation. The key types of derivatives are over-the-counter derivatives, which are privately negotiated between two parties, and exchange-traded derivatives, which are traded on organized exchanges.
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Importance of derivatives in risk management
Derivatives are contracts whose value is based on an underlying asset. Common types include forwards, futures, options, and swaps. Forwards and swaps are bilateral contracts while futures are exchange-traded. Options provide the right but not obligation to buy or sell an asset. Derivatives help manage various types of risk, including systematic risks like market risk and interest rate risk, as well as unsystematic risks like business and financial risk. They improve price discovery, enhance market liquidity, and allow flexible risk management strategies like hedging.
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Currency derivatives are financial instruments whose value is derived from an underlying currency. The most common types of currency derivatives are currency futures and options contracts, which allow investors to buy or sell a specific amount of a currency pair, such as USD/INR, at a future date. Currency derivatives provide benefits like leverage, liquidity, and risk management. They allow risk to be transferred between entities with different risk tolerances, like companies and speculators. Speculators take on risk for a potential higher reward, while companies use derivatives to hedge and stabilize their costs. This shuffling of risk has positive impacts on the real economy.
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The document discusses various foreign exchange derivatives, including currency forwards, futures, options, and swaps. It notes that currency futures were first introduced on the NSE in 2008 on the USD-INR pair, and later expanded to other currency pairs. Currency options were introduced in 2010. The key features and differences between currency forwards, futures, and options are summarized. Futures are traded on exchanges, have standardized contracts, and involve clearing houses and margin requirements. Forwards involve customized over-the-counter contracts between two parties. Options give the buyer the right but not obligation to buy or sell currencies at a future date at a strike price.
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This document discusses hedging instruments for managing foreign exchange risk. It begins by defining foreign exchange exposure and classifying it into three categories: transaction exposure, translation exposure, and economic exposure. The document then discusses techniques for managing exposure, including forwards, futures, options, swaps, and combinations of these derivatives. It provides details on forwards contracts, interest rate swaps, currency swaps, and how premiums and discounts are calculated for forwards. The purpose is to explain common hedging instruments used to reduce foreign exchange risk.
Forward contracts (1)
Forward contracts allow parties to lock in an exchange rate for buying or selling an asset at a future date. There are several types of forward contracts including currency forwards. Currency forwards are used by importers, exporters, investors and borrowers to hedge against currency risk. Forward rates are determined based on interest rate differentials between currencies under the principle of covered interest rate parity.
Interest Rate Derivatives
This document discusses interest rate derivatives, which are financial instruments derived from underlying interest rates or cash markets. Some popular types of interest rate derivatives are futures, forwards, options, and swaps. Interest rate derivatives allow investors to adjust portfolio positions more quickly and cheaply than transacting in the underlying instruments. They also provide more liquidity. Specifically, the document defines interest rate futures, swaps, caps, and floors, and discusses the markets for exchange-traded versus over-the-counter interest rate derivatives.
9.kalpesh arvind shah.subject international banking and foreign exchange risk
This document discusses hedging instruments for managing foreign exchange risk. It begins by defining foreign exchange exposure and classifying it into three categories: transaction exposure, translation exposure, and economic exposure. The document then discusses techniques for managing exposure, including forwards, futures, options, swaps, and combinations. It provides details on derivatives, focusing on forwards-based derivatives like forward contracts, swaps, and futures contracts. Specific types of swaps like interest rate swaps and currency swaps are explained.
Basic19
This document discusses short-term asset and liability management for multinational corporations (MNCs). It shows that MNC subsidiaries with excess funds can deposit money in the eurocurrency market or lend to other MNC subsidiaries with deficiencies. The parent MNC can also borrow funds in the international commercial paper market. Short-term financing options help MNCs efficiently manage cash flows across borders.
Foreign Exchange (Fx) Derivatives
The document provides an overview of using foreign exchange (FX) derivatives, specifically FX swaps and outright forwards, for credit unions. It defines these derivatives and explains how they can be used to boost income or reduce borrowing costs. Key risks like default risk and re-pricing risk are discussed along with steps for risk management like setting policy amendments, internal accounting practices, and regulatory reporting requirements. Usage of FX derivatives must be approved by the regulator in writing with appropriate risk management controls.
Financial derivative
The document discusses various derivatives contracts including forwards, futures, options, swaps, and their key characteristics. A forward contract involves a customized, over-the-counter agreement to buy or sell an asset at a future date for a predetermined price. A future is a standardized forward contract traded on an exchange. Options provide the right but not obligation to buy or sell an asset. Swaps involve exchanging cash flows of different assets or currencies to hedge risks.
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9.kalpesh arvind shah.subject international banking and foreign exchange risk
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This document provides contact information for Britek Technologies including their address in Bolton Enterprise Centre, Washington St, Bolton BL3 5EY, phone number (+44) 161 850 0905, website www.britektechnologies.com, and email address info@britektechnologies.com.
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Group 4(iii)
This document discusses various derivative instruments used to manage foreign exchange risk, including options, futures, and swaps. It defines these instruments and provides examples of how they work. Options give the holder the right to buy or sell currency at a preset price on or before expiry. Futures are standardized contracts to exchange currencies at a specified rate. Swaps allow an exchange of interest rate or currency payment obligations between two counterparties. These derivatives help companies and investors hedge and manage their foreign currency risk exposures.
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The document discusses various currency derivatives used by multinational corporations (MNCs) and speculators. It explains forward contracts, currency futures, and options markets. Forward contracts allow MNCs to lock in exchange rates for future currency needs. Currency futures are standardized contracts traded on exchanges that MNCs can use to hedge currency positions. Options provide the right to buy or sell a currency at a set price and are used for hedging or speculation. The document compares features of different currency derivatives and how MNCs and speculators apply them.
Derivatives defined
Derivatives are financial instruments whose value is derived from an underlying asset. The four main types of derivatives are forwards, futures, options, and swaps. Forwards and futures are contracts to buy or sell an asset at a future date, while options give the right but not obligation to buy or sell. Swaps involve exchanging cash flows of one party's financial instrument for those of another party. Derivatives are traded both over-the-counter and on exchanges, and provide economic benefits like risk management and market liquidity.
Derivatives
1. The document discusses various types of derivatives including equity derivatives, forwards, futures, options, swaps, and warrants.
2. It explains the key features and differences between these derivatives, such as how forwards are customized contracts while futures are exchange-traded standardized contracts.
3. The roles of various participants in the derivatives markets are discussed, including hedgers who use derivatives to mitigate risk, speculators who take on risk to profit from price movements, and arbitrageurs who seek to profit from temporary price discrepancies.
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This document provides an introduction and overview of derivatives, including their history, types, and uses. It discusses futures, forwards, and options contracts. Futures are exchange-traded standardized contracts that require daily margin payments and settlement. Forwards are over-the-counter customized contracts that involve credit risk. Options provide the right but not obligation to buy or sell an underlying asset at a specified price on or before expiration. The document defines call and put options and explores factors that influence option pricing.
Risk Management & Impact of Budget on Rupee
A seminar was held on the 1st of March in conjunction with EY, NSE and Eforexindia. This is the presentation by Religare as we promoted the exchange platform to corporates and the benefits associated with it.
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FIEO have more than 24K exporters as their members across India, and the event was conducted in their Delhi HO. Shri Ajay Sahai, DG & CEO FIEO addressed the exporters on the important amendments in policies and new incentives to boost the declining Indian exports continuously past 14 months. The Exchange rate of Indian Rupee primarily against US Dollar was most crucial topic concerning all the exporters. Mr. Ankur Kapoor, Product Head Currency Religare Securities highlighted the key benefits of the exchange platform like market timing 9 Am to 5 Pm which is 9 Am to 4.30 PM in OTC. The price transparency and ease of execution of hedging even for transaction as low as 1000 $ are also few of the key features.
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This document discusses corporate risk management. It begins by classifying risks into 5 categories and describes methods for measuring risk in non-financial firms. It then explains principles of hedging using various financial instruments like forwards, futures, swaps, and options. The document provides details on how these instruments can be used for hedging different types of risks. It also discusses evolution of risk management tools and guidelines for effective risk management practices.
International finance second assignment
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Options - Forex Management Chapter II - Part I
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The document discusses foreign exchange markets and derivatives. It provides information on:
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3) Participants in forex markets include central banks, large financial institutions, corporations, and individual investors who take on roles as hedgers, speculators, or arbitrageurs.
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1. SEBI is launching European-style commodity options in India, beginning with gold options. Unlike equity options which settle at the spot price, commodity options will settle at the futures price on expiry.
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Derivatives are financial instruments that derive their value from an underlying asset such as stocks, bonds, currencies or commodities. There are several types of derivatives including forwards, futures, options and swaps. Forwards and swaps are traded over-the-counter (OTC) while futures and options are traded on organized exchanges. Derivatives allow participants to hedge risk, speculate, or seek arbitrage opportunities. While derivatives can help manage various risks, they also pose risks such as leverage, increased speculation, and complexity that can be difficult for retail investors to navigate. The derivatives market has various participants including hedgers who seek to reduce risk, speculators who take risks to earn profits, and arbitrageurs who exploit pricing
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The document discusses forwards and futures contracts. Forwards are privately negotiated agreements to buy or sell an asset at a future date, while futures are standardized contracts traded on public exchanges. Key differences are that futures are exchange-traded while forwards are over-the-counter, and futures have standardized contract terms while forwards are customized. The document also covers futures pricing models, margin requirements for long and short positions, and arbitrage strategies like cash and carry arbitrage.
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This document provides an overview of derivatives, including financial derivatives and commodity derivatives. It defines derivatives as instruments whose value is derived from an underlying asset. Financial derivatives discussed include forwards, futures, options, and swaps, which are used for hedging risks and speculating on financial instruments. Commodity derivatives allow trading of agricultural and mined products to manage price risks. Benefits of commodity derivatives trading include risk management, price discovery, and portfolio diversification. The document also outlines the commodity futures trading process and delivery or cash settlement at contract expiration.
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1. The document discusses various derivatives trading concepts such as futures contracts, forward contracts, and options. It explains that futures contracts are standardized agreements to buy or sell an asset at a specified price on a future date, while forward contracts are customized agreements with physical delivery of the asset.
2. Options are described as contracts that give the buyer the right but not the obligation to buy or sell an asset at a specified price on or before the expiration date. The main types are calls, which are rights to buy, and puts, which are rights to sell.
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- A forward market allows for the future delivery of stocks, currencies, or commodities at a predetermined price, protecting buyers and sellers from price fluctuations. Forward contracts are privately negotiated over-the-counter, while futures contracts are standardized and traded on an exchange.
- The main purposes of forward and futures markets are to hedge against risks from fluctuating prices and interest rates and to allow investors to speculate. These markets provide flexibility and reduce risks for financial companies and investors.
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The document discusses Uganda's financial services sector. It describes the four tiers of financial institutions in Uganda: (1) commercial banks that take deposits and make loans; (2) credit institutions that also take deposits and make loans; (3) microdeposit-taking institutions (MDIs) that accept small deposits and make small loans; and (4) unregulated institutions like SACCOs that make loans but do not accept deposits. It then provides examples of institutions that fall into each tier and describes their distinguishing characteristics and regulations.
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The document discusses Uganda's financial services sector. It begins with a historical overview of banking in Uganda, from the initial four commercial banks at independence to periods of economic breakdown and reforms. It then describes the structure of Uganda's financial sector, including the roles of various institutions such as commercial banks, development banks, microfinance organizations, and the Bank of Uganda as regulator. The informal financial sector is also briefly outlined.
The legal environment unit3
This document provides an overview of key Ugandan laws that regulate banking and financial services. It discusses the Financial Institutions Act of 2004, which guides the operation of banks and non-banks and aims to maintain confidence in the financial system. It also covers the Bank of Uganda Act of 2000, which gives the central bank authority to supervise financial institutions. Additional acts discussed include the Bills of Exchange Act regarding negotiable instruments, and the Micro Finance Deposit-Taking Institutions Act of 2003 concerning the regulation of microfinance institutions. The conclusion emphasizes that bankers must understand and conform to relevant legislation in order to properly perform their daily tasks.
The legal environment unit2
This document discusses contract law and its importance in banking. It covers the following key points:
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This document provides an overview of the legal environment module for the Uganda Institute of Banking & Financial Services. It discusses the sources of law relating to financial institutions, including acts of parliament, statutes, and legal principles. It also covers specific topics like contract law, negotiable instruments, and the relationship between banks and their customers. The role of legislation in regulating the banking sector is explained, along with key concepts like the definition of law, the classification of law into public and civil components, and the "Code of Banking" which comprises established practice rules for the industry.
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The document discusses the banker-customer relationship under contract law. It defines key terms like banker, customer, and bank. A banker is defined as someone who carries out the business of banking like accepting deposits and honoring checks. A customer is anyone who uses a bank's services, including those without an account. The relationship is a contractual one, with implied rights and duties. Rights of bankers include charging fees and interest, while duties include keeping information confidential and honoring valid checks. The contract can end through termination by either party, by operation of law like death, or after reasonable notice from the bank.
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This document discusses the banker-customer relationship under contract law in Uganda. It begins by defining key terms like "banker", "customer", and "banking". A banker is defined as someone who carries out the business of banking, such as accepting deposits and honoring withdrawals. A customer is anyone who enters an agreement with a bank for services.
The relationship between a banker and customer is described as contractual, with implied rights and duties. General contract law principles apply. When opening an account, banks must verify a customer's identity and obtain signatures or mandates authorizing transactions. Both bankers and customers have legal rights and duties in the contract, such as bankers having the right to charge fees and customers having the duty to
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This document discusses negotiable instruments and bank cheques. It defines negotiable instruments as documents used in commerce to secure payment of money. Cheques are specifically defined as written promises by the drawer for the bank to pay the payee on demand. The key parties to a cheque are the drawer, drawee (bank) and payee. Features of a cheque include the cheque number, sort code, account number and crossing lines instructing the bank to deposit funds in the payee's account rather than paying in cash. Negotiable instruments must bear the maker's signature, include an unconditional promise to pay a fixed sum, specify a payment on demand or at a definite time, and be payable to order or to bear
Economic environment unit3
This document discusses pricing mechanisms and concepts from an economics perspective. It defines pricing as the process of determining the cost for goods and services based on factors like production costs, competition and demand. It then describes price mechanisms as how buyers and sellers negotiate prices based on supply and demand through mutual exchanges. Finally, it outlines three key functions of price mechanisms: 1) they act as signals to producers about supply and demand, 2) they transmit consumer preferences to producers, and 3) they provide incentives for producers and consumers to change their behavior in response to price changes.
Economic environment unit2
Banks play an important role in the economy by serving as financial intermediaries. They accept deposits from savers and pool those funds to provide credit to borrowers, either directly through lending or indirectly by investing in capital markets. This transfers funds from those with surplus money to invest to those who need to borrow funds. Commercial banks also facilitate national and international trade by transferring funds, which is key to the functioning of the economy. Banks include central banks that implement monetary policy, commercial banks that accept deposits and provide credit, savings banks for lower income savers, and development banks that lend to new businesses.
Economic environment unit8
This document discusses environmental conservation and its relationship to economics. It begins by defining economics and the environment. It then outlines global trends in increasing priority given to environmental protection, including frameworks like the UNFCC and Kyoto Protocol. For Uganda specifically, the document notes that environmental sustainability is a strategic objective in development plans but the country has not performed well on related MDG measures. It emphasizes that Uganda's prosperity relies on biodiversity that faces threats. Finally, it describes the interrelationship between the environment and economics, noting the environment supplies resources and economic prosperity relies on it.
Economic environment unit7
The document discusses international trade and regional economic integration in Africa. It provides details on several major regional economic communities in Africa, including COMESA and the East African Community (EAC). COMESA aims to promote economic development and trade by removing barriers between member states. Its goals include establishing a free trade area and eventually a common market and monetary union. The EAC also seeks to deepen economic and political integration between its members through cooperation in areas like trade, infrastructure, and security. Both organizations aim to boost intra-regional trade and investment through gradual economic harmonization and coordination between states.
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The document discusses the role of government in regulating economic activity and maintaining stable market conditions. It describes how governments establish legal frameworks, regulate industries like banking, implement fiscal and monetary policies to influence economic growth and inflation, redistribute resources, and address externalities. Specifically, it outlines the government's role in regulating general business interactions and specific industries, using policies like taxation and money supply management to guide economic stabilization, and providing services that markets do not.
Economic environment unit5
The document discusses different types of business organizations including sole proprietorships, partnerships, limited liability companies, and cooperatives. It provides details on the key advantages and disadvantages of each type. Sole proprietorships are easy to establish but the owner bears all financial risks, while partnerships allow for more capital but partners have unlimited liability. Limited liability companies provide protection of personal assets but involve more legal formalities. Cooperatives make it easier to raise capital from members but with less personal control over business decisions.
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This document discusses inflation, including its definition, causes, effects, and methods of control. Inflation is defined as a rise in the general level of prices for goods and services in an economy over time, which causes a loss of purchasing power. Common causes of inflation include increases in production costs, demand, money supply, and imported goods prices. Effects can be both positive, like encouraging investment, and negative, like uncertainty reducing investment. Controlling inflation involves monetary policy through central banks targeting low interest and inflation rates.
Economic environment unit1
This document provides an overview of key economic concepts and the economic environment. It begins by explaining the objectives of the module which are to explain the economic environment, basic economic concepts, micro and macroeconomics, and different economic situations and their causes. It then defines several important economic terms and concepts such as scarcity, resources, supply, demand, market equilibrium, production, cost, efficiency, and opportunity cost. It also distinguishes between microeconomics and macroeconomics and explains economic indicators like economic growth, inflation, employment, and unemployment.
Lending unit 9
The document discusses lending, insolvency, receivership, and bankruptcy from the perspective of banks and lenders. It covers the typical lending cycle and key issues at each stage. Acts of bankruptcy under Ugandan law are outlined, including conveyance of property to trustees or fraudulent transfers. The implications of receivership are summarized, such as the receiver taking charge of the borrower's affairs and replacing management. Finally, the duties of a receiver and effects of bankruptcy are briefly explained, such as proof of debts by creditors and priority of certain debt types in distribution of the bankrupt's property.
Lending unit 8
The document discusses lending in the banking business and concepts related to insolvency. It begins by outlining the learning outcomes which are to articulate the role of lending, discuss the bank lending cycle, and explain insolvency, bankruptcy, and receivership. It then provides definitions of key terms like insolvency, receivership, and bankruptcy. Finally, it lists 11 signs that can indicate a business or individual is insolvent, such as continuing losses, current liabilities exceeding assets, unpaid taxes, and suppliers requiring cash-on-delivery or special payments. The document aims to explain these lending and insolvency concepts to banking and financial services students.
Lending unit 7
This document discusses lending in the banking business. It covers general principles of good lending, the typical lending cycle, and remedies for defaulting borrowers. Delinquency or default refers to a borrower failing to pay installments on time. Causes of delinquency include inability to pay, business failure, adverse economic conditions, willful default, death, inappropriate loan terms, and bankruptcy. Managing delinquency involves preventing late payments through proper underwriting and tailoring loans to borrowers' needs. It also involves solving existing delinquencies through measures ranging from contact and rescheduling to seizing and selling collateral.
Lending unit 5
This document discusses different types of lending in the banking business. It defines corporate lending as lending to companies and institutions that are separate legal entities, while retail lending refers to lending to individuals and small businesses. The key differences between corporate and retail lending are loan amounts, who signs contracts and bears liability, and complexity. Requirements for corporate lending include the company being incorporated and having authority to borrow, while requirements for retail lending include the borrower being an adult of sound mind and having debt repayment capacity. Mortgage lending is also discussed as a specialized type of lending secured by property.
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Presentation by Herman Kienhuis (Curiosity VC) on Investing in AI for ABS Alu...
International business unit7
- 1. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED Trade Finance Facilities Swift and Other Bank International Payments Vostro Accounts and Nostro Accounts Dealing in Foreign Currencies Forward options Forward Contracts MODULE COVERAGE 1 How Collections Work Currency options Factoring
- 2. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED What is currency option? • A currency option (also FX or forex option) is a financial derivative that gives the buyer the right (not the obligation) to buy (call) or sell (put) a currency at a specified exchange rate during a specified period of time. The contract grants the holder the right, but not the obligation, to buy or sell currency. The option owner can exercise this right when it is to his/her advantage before the expiry. • For this right, a premium is paid to the bank/broker. Currency options are one of the best ways for corporations or individuals to hedge against adverse exposure movements in exchange rates at future dates and to also take advantage of favorable movements in the exchange rates. Investors can hedge against foreign currency risk by purchasing a currency option “put” or “call”. When the Currency option is bought, the risk is limited to the premium paid for the derivative. The value of an option contract at its expiry date is the value which is realized by the holder in exercising his option at that point. For example: • If the option contract lapses and the holder gains or the contract has intrinsic value it is said to be 'in the money' • If the option contract lapses and the holder loses or the contract has negative intrinsic value it is said to be 'out of the money' • If the option contract lapses and the holder neither gains nor loses (the contract has no intrinsic value) it is said to be ‘at the money' or ‘at par’ 2
- 3. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED There are two types of currency options: a. Put option- This gives the right but not the obligation to sell one currency and receive another currency at the strike rate.” Put” options give the option to sell at a certain price, so the buyer would want the rate to go down in order to gain. b. Call option- This gives the customer the right but not the obligation to buy the currency with another currency at the strike rate. “Call” options give the option to buy at certain price, so the buyer would want the rate to go up in order to gain. Features of currency option contracts 1. The currency pair should be indicated- e.g. US Dollar - Uganda Shillings (USD- UGX) spot rate. 2. The type of option should be clearly stated either “call” or “put” options. 3. The contract amount should be stated - e.g. USD 1,000 4. The currency of the premium should be quoted- e.g. UGX 5. The currency outstanding position shall be in USD. 6. The maturity of the contracts should be indicated- e.g. Shall not exceed twelve months. 3
- 4. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED 7. The mode of payment and currency in which the contracts should be settled- e.g. cash in Uganda Shillings. 8. The basis of the settlement price should be stated- e.g. Bank of Uganda Reference Rate on the date of expiry of the contracts. 4
- 5. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED How the currency option works The pricing of an option uses a formula which looks at both the current value of the currency and a time value, calculated on the basis of market expectations, volatility and any difference in interest rates between the two currencies specified in the contract. The best way in pricing an option is to set the price low enough to attract buyers, but also to set it high enough to attract sellers and guarantors for the contract. Options can be used to reduce the risk of unexpected movements in the currency market. When a currency option is bought, then losses will be limited simply to the price of the option. However, when a currency option is sold; the losses can be more substantial and are potentially unlimited. The advantages and disadvantages of a forex options • Currency options have the following advantages: • The customer can choose to exercise the currency option when the rates are favaourable. Alternatively, he may choose not to exercise the foreign currency option or to let the option expire (not exercise). • Limited risk - Provides protection against adverse currency movements with the potential to financially benefit from favourable Currency movements. • Considerable profit potential due to taking advantage of favourable changes in the exchange rate. 5
- 6. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED Currency options have the following disadvantages: a. If the foreign currency option expires and is not exercised, it is worthless as the premium you paid becomes an additional cost since it is not refundable b. The expiry date or term cannot be extended c. The currency option holder may not recoup the full premium paid if the foreign currency option is terminated prior to the expiry date d. Premium has to be paid up- front. 6
Editor's Notes
- By the end of this unit, the students should be able to: Explain how currency options work in payments Discuss the advantages and disadvantages of using currency options in international business Explain the impact of terminating a currency option