Forward Contract Quantitative Analysis April 15, 2008.

Slides:

Advertisements

Similar presentations

Options and Futures Faculty of Economics & Business The University of Sydney Shino Takayama.

Advertisements

Off-Balance Sheet Managing Risk. Off-Balance Sheet Liabilities on the balance sheet represent liabilities that are both firm and quantifiable. Liabilities.

FINC4101 Investment Analysis

Futures Markets and Risk Management

Mechanics of Futures and Forward Markets

1 Futures Futures Markets Futures and Forward Trading Mechanism Speculation versus Hedging Futures Pricing Foreign Exchange, stock index, and Interest.

Getting In and Out of Futures Contracts By Peter Lang and Chris Schafer.

Class Business Groupwork Group Evaluations Course Evaluations Review Session – Tuesday, 6/ am, 270 TNRB.

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved Futures Markets Chapter 22.

Futures markets. Forward - an agreement calling for a future delivery of an asset at an agreed-upon price Futures - similar to forward but feature formalized.

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Futures Markets and Risk Management 17 Bodie, Kane, and Marcus.

Forward and Futures. Forward Contracts A forward contract is an agreement to buy or sell an asset at a certain time in the future for a certain price.

 Derivatives are products whose values are derived from one or more, basic underlying variables.  Types of derivatives are many- 1. Forwards 2. Futures.

Futures Contracts Basics Futures prices Margin Accounts Futures and arbitrage Expected Payoffs Hedging.

1.1 Introduction Chapter The Nature of Derivatives A derivative is an instrument whose value depends on the values of other more basic underlying.

1 Introduction Chapter 1. 2 Chapter Outline 1.1 Exchange-traded markets 1.2 Over-the-counter markets 1.3 Forward contracts 1.4 Futures contracts 1.5 Options.

1 Forward and Future Chapter A Forward Contract An legal binding agreement between two parties whereby one (with the long position) contracts to.

Ch26 Interest rate Futures and Swaps Interest-rate futures contracts Pricing Interest-rate futures Applications in Bond portfolio management Interest rate.

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Futures Markets and Risk Management CHAPTER 17.

金融工程导论讲师：何志刚，倪禾 *

Futures and Options Econ71a: Spring 2007 Mayo, chapters Section 4.6.1,

1 1 Ch22&23 – MBA 567 Futures Futures Markets Futures and Forward Trading Mechanism Speculation versus Hedging Futures Pricing Foreign Exchange, stock.

FUTURES DEFINITION Futures (forward) contracts are agreements between two agents where one agrees to purchase and the other to sell (deliver) a given amount.

Futures & SWAPS Financial Derivatives Shanghai Spring 2014 Week 3-4 FINC 5880 Answers Class Assignments.

Intermediate Investments F3031 Spot Futures Parity How to value a futures contract (REVIEW) –Create two portfolios. In the first, buy the asset and then.

Chapter 7 The Foreign Exchange Market. Outlines… Introduction, The Structure Of Foreign Exchange Market, Functions of foreign exchange markets Spot Market.

Currency Futures and Forwards. Outline Meaning of Futures Features of Futures Contracts Using Futures for Hedging and Speculation Meaning of Forwards.

Finance 300 Financial Markets Lecture 23 © Professor J. Petry, Fall 2001

Financial Instruments

What is a Derivative? A derivative is an instrument whose value depends on, or is derived from, the value of another asset. Examples: futures, forwards,

Chapter 1 Introduction Options, Futures, and Other Derivatives, 8th Edition, Copyright © John C. Hull 2012.

FUTURES. Definition Futures are marketable forward contracts. Forward Contracts are agreements to buy or sell a specified asset (commodities, indices,

1 Introduction Chapter 1. 2 The Nature of Derivatives A derivative is an instrument whose value depends on the values of other more basic underlying variables.

Options, Futures, and Other Derivatives, 4th edition © 1999 by John C. Hull 1.1 Introduction Chapter 1.

Options, Futures, and Other Derivatives, 6 th Edition, Copyright © John C. Hull Introduction Chapter 1.

Introduction Chapter 1 Options, Futures, and Other Derivatives, 7th Edition, Copyright © John C. Hull 2008.

Options, Futures, and Other Derivatives, 4th edition © 1999 by John C. Hull 1.1 Options, Futures and other Derivatives

Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 1.1 Introduction Chapter 1.

Derivatives Derivatives are usually broadly categorized by: The relationship between the underlying and the derivative (e.g. forward, option, swap) The.

2.1 Mechanics of Futures and Forward Markets. 2.2 Futures Contracts Available on a wide range of underlyings Exchange traded Specifications need to be.

McGraw-Hill/Irwin © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Futures Markets CHAPTER 16.

Financial Derivatives Chapter 12. Chapter 12 Learning Objectives Define financial derivative Explain the function of financial derivatives Compare and.

Forward and Futures. Forward Contracts A forward contract is an agreement to buy or sell an asset at a certain time in the future for a certain price.

Paola Lucantoni Financial Market Law and Regulation.

Intermeiate Investments F3031 Futures Markets: Futures and Forwards Futures and forwards can be used for two diverse reasons: –Hedging –Speculation Unlike.

Derivatives. What is Derivatives? Derivatives are financial instruments that derive their value from the underlying assets(assets it represents) Assets.

Investments, 8 th edition Bodie, Kane and Marcus Slides by Susan Hine McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights.

Introduction Chapter 1 Options, Futures, and Other Derivatives, 7th International Edition, Copyright © John C. Hull

1 Chapter 11 Hedging, Insuring, Diversifying. 2 Contents 1. Forward and Futures to Hedge Risk 2. Swap Contracts 3. Hedging, Matching Assets to Liabilities.

Fundamentals of Futures and Options Markets, 6 th Edition, Copyright © John C. Hull Introduction Chapter 1.

CMA Part 2 Financial Decision Making Study Unit 5 - Financial Instruments and Cost of Capital Ronald Schmidt, CMA, CFM.

Professor XXX Course Name & Number Date Risk Management and Financial Engineering Chapter 21.

0 Forwards, futures swaps and options WORKBOOK By Ramon Rabinovitch.

BONDS & FUTURES. WHY BUY BONDS? Corporate and Government bonds are other forms of investment. Return is usually lower than stock dividends but generally.

1 MGT 821/ECON 873 Financial Derivatives Lecture 1 Introduction.

DER I VAT I VES WEEK 7. Financial Markets  Spot/Cash Markets  Equity Market (Stock Exchanges)  Bill and Bond Markets  Foreign Exchange  Derivative.

DERIVATIVES By R. Srinivasan. Introduction  A derivative can be defined as a financial instrument whose value depends on (or is derived from) the values.

McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 22 Futures Markets.

Introduction: Derivatives Options - a contract that gives buyer the right (not obligation) to purchase or sell something at a later time. Forward/Futures.

A derivative is a security, whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between.

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 1 Chapter 18.

CHAPTER 22 Investments Futures Markets Slides by Richard D. Johnson Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin.

Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill /Irwin 10-1 Chapter Ten Derivative Securities Markets.

Futures Markets and Risk Management

Financial Derivatives

Forward Contract A forward contract is a customized contractual agreement where two private parties agree to trade a particular asset with each other at.

Introduction Chapter 1 Options, Futures, and Other Derivatives, 7th International Edition, Copyright © John C. Hull 2008.

CHAPTER 22 Futures Markets.

Presentation transcript:

Forward Contract Quantitative Analysis April 15, 2008

1 Overview 1.PG&E’s Power Mix 2.What is a Forward Contract 3.Some features of Forward Contract 4.Why do we use Forward Contracts? 5.Pricing Forward Contract 6.Valuing Forward Contract 7.Swaps

2 What is Forward Contract? Definition: An agreement between two parties to buy or sell an asset at a certain future time for a certain price. Example 1] Company A contracts to buy 5,000 bushels of wheat from Company B for delivery in 1 year. Price is agreed at 300 cents/bushel  Total value of the contract (Forward Price) = 300cents/bushel * 5000 bushels = $15,000 * 1 bushel ~ 60 lb Example 2] Today, PG&E contracts to buy 10,000 mmBtu of Natural Gas from BP Energy Co. for delivery on the day of May 15 which in 1 month. Price is agreed at $8.25/mmBtu  Total Value of the contract (Forward Price) = $8.25/mmBtu * 10,000 mmBtu = $82,500 * 1 mmBtu ~ m³

3 Some Features of Forward Contract No money or goods change hands before maturity Can buy and sell risk without holding the physical Good for hedging (or speculating)

4 Why do we use Forward Contracts? PG&E Power Mix

5 Pricing Forward Contract Suppose we have a forward contract on one share of common stock that pays no dividends. Under the assumption of no arbitrage, this should be equal to the current stock price, hence:

6 Valuing Forward Contract

7 Swaps In reality, traders use Swaps rather than Forward Contracts or Futures (standardized Forward Contract traded in exchanges such as NYMEX) What is Swap? Swap is an agreement to exchange one cash flow stream for another 1.Purchase 10,000 mmBtu/day of gas for delivery at PG&E Citygate in Jan Execute a fixed-for-floating swap at $8/mmBtu also for delivery in Jan 2009