Week-10-Futures and Forwards.pptx - DERIVATIVES CH 10 NOTE...

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DERIVATIVES CH 10
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NOTE: Before being licensed to sell futures & options in Canada you must complete these extra courses beyond what’s required to sell stocks and bonds. They are both offered by CSI Global Education Inc.: Derivatives Fundamentals Course Options Licensing Course
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Derivatives are financial instruments that derive their value from the value of a specified underlying asset or index Overview
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Speculation: You can use derivatives to make a bet on whether some underlying asset will rise or fall in value. Hedging (reducing risk): Suppose you own a portfolio of stocks. You can use derivatives to protect yourself against a drop in the stock market. Suppose you own a bond in a foreign currency. You can eliminate the currency risk associated with the receipts of weakening foreign currency using derivatives. What are derivatives used for?
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Clients of Financial advisors may want them for speculative or hedging purposes Financial planners may want to recommend them for clients, especially for minimizing risk. (eg. Equity index put options or Foreign exchange forwards.) To alert yourself to their potential benefits and risks for your own investments They are a large part of financial markets and influence the prices of underlying assets like the stock market Why study derivatives?
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Forward & Futures Contracts (this week) Options (next week) Which Derivatives will we look at?
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FUTURES CONTRACTS
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A Legally binding commitment To deliver (sell) or receive (buy) A specified asset For a specified price On a specified future date Futures Contract
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To “buy a futures contract” means you are making a contract to buy the underlying asset on some date in the future. To “sell a futures contract” means you are making a contract to sell the underlying asset on some date in the future. Terminology
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An agreement to buy 100,000 Euros on Dec 21 for C$ 136,000. Eg. Buying a EURO Futures Contract
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I agree to buy $100,000 face value of Government of Canada 10 year bonds next Jan 20 at a price of 96.4. I agree to buy 1000 barrels of oil at US$98 per barrel on Sep 16. Examples: BUYING a futures contract
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I agree to sell C$ 100,000 for US 0.98 Dollars per C$ next April 15 (ie for US$ 98,000) I agree to sell $1,000,000 face value of 10 year Government of Canada bonds at a price of 97.32 next April 15 Examples: SELLING a futures contract
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Futures contracts allow the buyer and seller to “lock- in” a future transaction price. On the contract maturity date their previously agreed transaction price will likely end up being either higher or lower than the prevailing spot price for the underlying asset. Futures contracts
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Suppose Albert agrees to buy 1,000 bushels of wheat from Farmer Brenda in 3 months at a price of $6/bushel.
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  • Fall '19
  • seller, ICE Futures Canada Inc.

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