Topic 8. Forwards and futures in risk management

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Topic 8. Forwards and futures in risk management

• 8.1 Introduction of forward and futures contract
• 8.2 Hedging interest rate risk
• 8.3 Hedging foreign exchange risk
• 8.4 Hedging credit risk

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8.1 Introduction of forward and futures contract

• Forward contract
• A forward contract is a contractual agreement
  made directly between two parties, says A and B,
• Party A (Long the forward contract/Long
  position) (Buyer of the forward contract)
• He agrees to buy the underlying asset at certain
  future time (maturity date) for a agreed
  contractual price (forward price) (delivery
  price).
• Party B (Short the forward contract/Short
  position) (Seller of the forward contract)
• He agrees to sell the underlying asset at
  maturity date for the forward price.

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8.1 Introduction of forward and futures contract
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8.1 Introduction of forward and futures contract

• The underlying asset of the forward contact can
  be commodities such as live cattle, oil and gold,
  and financial assets like bonds, currencies and
  stock indices.
• Forward contract is traded in the
  over-the-counter (OTC) market.
• The payoff (??) of the forward contract at the
  maturity date T is given by
• Long position ST