ForwardsFutures - Session 1 Introduction to Forwards and...

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Session 1 Introduction to Forwards and Futures
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Forward Contracts A forward contract is a bilateral agreement to buy/sell an asset at a certain time in the future for a predetermined price At the end of the life of the contract one party buys the asset for the agreed price from the other party Any feature of a forward contract is negotiable Forwards can be customized to fit the exact needs of the parties 2
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Forward Contracts are Everywhere Many real-life transactions have deferred delivery and payment Contract to purchase a house/car Job offer 3
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Forward Contracts Are Ancient Promise to deliver wooden objects and silver in the future, dated 1900 BC, Southern Mesopotamia. (van der Mieroop, 2005) 4
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Futures Contracts Traded on organized exchanges Standardized specifications: What can be delivered, Where it can be delivered When it can be delivered ““Settled” daily The losing party transfer cash to the exchange This cash is then credited to the account of the winning party 5
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Delivery on a Futures Contract Futures contracts not closed out before maturity, are settled by delivery of the assets underlying the contract
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