FUTURES AND DERIVATIVES UNIT 18

WHAT DO YOU REMEMBER ABOUT HEDGE FUNDS?   Watch the video and compare your answers.   what-are-hedge-funds#axzz1uykedcq0 what-are-hedge-funds#axzz1uykedcq0

INTRODUCTION   STOCKS AND BONDS - have existed, in various forms, for hundreds of years   FUTURES AND DERIVATIVES – more recent financial instruments – more difficult to understand than stocks and bonds   Various banks, companies, and local governments - have suffered serious problems, or even bankruptcy, as a result of using derivatives

VOCABULARY – FUTURES AND DERIVATIVES – MK, p. 92   Before hearing about derivatives, match- up the half-sentences which define some basic terms.

HOW DO FUTURES CONTRACTS WORK? – A VIDEO   Watch the video and find out.   utures-contract-explained#axzz1uykedcq0 utures-contract-explained#axzz1uykedcq0

WHAT IS A DERIVATIVE? – A VIDEO   Watch the video and find out.   derivative#axzz1uykedcq0 derivative#axzz1uykedcq0

WHAT IS A DERIVATIVE? – FILL IN THE MISSING WORDS.   A security whose price is dependent upon or derived from one or more underlying a____________.   The derivative itself is merely a c____________ between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include s____________, b____________, c____________, c____________, i_____________ r____________ and market indexes.   There are even derivatives based on w____________ data, such as the amount of rain or the number of sunny days in a particular region.

  Derivatives are generally used as an instrument to h_____________ risk, but can also be used for s_____________ purposes.   AN EXAMPLE: a European investor purchasing shares of an American company off of an American exchange (using U.S. dollars to do so) → exposed to exchange rate risk while holding that stock. To hedge this risk, the investor could purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into Euros.

MATCH THE QUESTIONS WITH THE ANSWERS. 1) 1)WHAT ARE THE MAIN TYPES OF DERIVATIVES? 2) 2)WHAT ARE DERIVATIVES USED FOR? 3) 3)ARE DERIVATIVES RISKY? _____ Generally, as an instrument to hedge risk, but can also be used for speculative purposes. _____ Yes, because there is no limit to how much the value of the underlying asset can change, with the possibility of huge losses on the derivative instrument. _____ Futures, options and swaps.

MATCH THE QUESTIONS WITH THE ANSWERS. 4) 4)WHAT ARE THE MOST IMPORTANT COMMODITIES TRADED ON FUTURES MARKETS? 5) 5)WHY HAVE FUTURES MARKETS DEVELOPED? ______ Both producers of commodities, and buyers – for example, manufacturers of coffee and copper pipes - are interested in hedging to guarantee a future price - and because there are a lot of speculators. ______ METALS - gold, silver, copper, steel, platinum, etc. SOFT COMMODITIES - coffee, tea, orange juice, sugar, cocoa, grains (e.g. corn, wheat, soybeans), potatoes, beef, pork, livestock (e.g. cattle, hogs), etc.

MATCH THE QUESTIONS WITH THE ANSWERS. 6) 6)WHAT ARE THE MAIN TYPES OF FUTURES MARKETS? 7) 7)WHAT IS THE DIFFERENCE BETWEEN FUTURES MARKETS AND SPOT (CASH) MARKETS? 8) 8)WHERE ARE THE MAJOR FUTURES MARKETS? ______ Chicago, London, New York, Frankfurt, Paris, Sao Paulo ______ Futures markets in commodities, currencies and various financial securities ______ Commodities, currencies and various financial securities are traded for immediate delivery at their current price on spot markets.

HEDGING VS. SPECULATION

HOW DO YOU COMMENT ON THE FOLLOWING CARTOON?