EFN406 Lecture 09 2009

EFN406 Lecture 09 2009 - Click to edit Master subtitle...

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Unformatted text preview: Click to edit Master subtitle style 2009 EFN406 Managerial Finance EFN406 Managerial Finance Topic 9 Futures and Forwards Options and Warrants Click to edit Master subtitle style 2009 EFN406 Managerial Finance Forwards and Futures Reading Ch 17 Study 17.1 to 17.5 Read Lightly 17.6 and 17.11 2009 EFN406 Managerial Finance 2009 EFN406 Managerial Finance 3Slide 3 Learning Objectives l Know the difference between a forward and a future. l Be able to gather information on futures from the media. l Understand how futures markets are organised. l Understand the system of deposits, margins and marking-to-market used by futures exchanges. l Understanding of the determinants of futures prices. l Explain the features of financial futures traded on the Sydney Futures Exchange. l Understand how to hedge (long and short) l Distinguish speculation from hedging. 2009 EFN406 Managerial Finance 2009 EFN406 Managerial Finance 4Slide 4 Forwards/Futures Example: It is January 2008, and a wool grower expects to have 7500 kg of wool ready for sale in September (2008). The current price of wool (ie, the cash or spot price) in January is 740 cents per kg. The wool grower will fear a price decline between January and September, because he will be worse off if that happens. Of course, if wool prices rise between January and September, the grower will be better off. But uncertainty means he doesn't know which way prices will go. 2009 EFN406 Managerial Finance 2009 EFN406 Managerial Finance 5Slide 5 The Other Side Also having an interest in wool prices is a buyer of wool in the clothing industry. This manufacturer anticipates that she will require 7500 kg of wool in September 2008. The concerns of this buyer of wool are the opposite to the concerns of the seller/grower. The buyer fears that wool prices will rise between January and September. In the buyer's case, she will be better off if wool prices fall during this period. 2009 EFN406 Managerial Finance 2009 EFN406 Managerial Finance 6Slide 6 Eliminating the Risk Both parties, being risk averse, may prefer to eliminate the price uncertainty. A suitable solution would be for the wool grower to get together with the wool buyer today (in January) and agree on the price at which the September transaction will take place. For example, may agree to trade in September at 740 C kg. No matter which way prices move leading up to September, both parties know their price with certainty . This agreement eliminates all uncertainty regarding wool price movements, but is subject to default risk (counterparty risk) . 2009 EFN406 Managerial Finance 2009 EFN406 Managerial Finance 7Slide 7 Forward/Futures - Definition Forwards versus Futures A forward or futures contract is an agreement which provides that something will be sold in the future at a fixed price....
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This note was uploaded on 09/15/2010 for the course BUSINESS 406 taught by Professor John during the Three '10 term at Queensland Tech.

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EFN406 Lecture 09 2009 - Click to edit Master subtitle...

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