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Lecture Financial institutions, instruments and markets (7e): Chapter 19 - Christopher Viney, Peter Phillips

Chapter 19 - Futures contracts and forward rate agreements. In this chapter, you will: Consider the nature and purpose of derivative products, outline features of a futures transaction, review the types of futures contracts available through a futures exchange, identify why participants use derivative markets and how futures are used to hedge price risk,. | Chapter 19 Futures contracts and forward rate agreements Websites: www.asx.com.au www.cme.com www.cbot.com www.liffe.com www.hkex.com.hk www.sgx.com Learning objectives Consider the nature and purpose of derivative products Outline features of a futures transaction Review the types of futures contracts available through a futures exchange Identify why participants use derivative markets and how futures are used to hedge price risk Identify risks associated with using a futures contract hedging strategy Explain and illustrate the use of an FRA for hedging interest rate risk Describe the use of a forward rate agreement for hedging interest rate risk Chapter organisation 19.1 Hedging using futures contracts 19.2 Main features of a futures transaction 19.3 Futures market instruments 19.4 Futures market participants 19.5 Hedging: risk management using futures 19.6 Risks in using futures markets for hedging 19.7 Forward rate agreements (FRAs) 19.8 Summary 19.1 Hedging using futures contracts Futures contracts and FRAs are called derivatives because they derive their price from an underlying physical market product Two main types of derivative contracts 1. Commodity (e.g. gold, wheat and cattle) 2. Financial (e.g. shares, government securities and money market instruments) Derivative contracts enable investors and borrowers to protect assets and liabilities against the risk of changes in interest rates, exchange rates and share prices (cont.) 19.1 Hedging using futures contracts (cont.) Hedging involves transferring the risk of unanticipated changes in prices, interest rates or exchange rates to another party A futures contract is the right to buy or sell a specific item at a specified future date at a price determined today The change in the market price of a commodity or security is offset by a profit or loss on the futures contract (cont.) 19.1 Hedging using futures contracts (cont.) Example: A farmer wants to sell wheat in a couple of months, but | Chapter 19 Futures contracts and forward rate agreements Websites: www.asx.com.au www.cme.com www.cbot.com www.liffe.com www.hkex.com.hk www.sgx.com Learning objectives Consider the nature and purpose of derivative products Outline features of a futures transaction Review the types of futures contracts available through a futures exchange Identify why participants use derivative markets and how futures are used to hedge price risk Identify risks associated with using a futures contract hedging strategy Explain and illustrate the use of an FRA for hedging interest rate risk Describe the use of a forward rate agreement for hedging interest rate risk Chapter organisation 19.1 Hedging using futures contracts 19.2 Main features of a futures transaction 19.3 Futures market instruments 19.4 Futures market participants 19.5 Hedging: risk management using futures 19.6 Risks in using futures markets for hedging 19.7 Forward rate agreements (FRAs) 19.8 Summary 19.1 Hedging using .