{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

EFN406 Lecture 09 2009 - EFN406 Managerial Finance Topic 9...

Info icon This preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
Click to edit Master subtitle style 2009 EFN406 Managerial Finance EFN406 Managerial Finance Topic 9 Futures and Forwards Options and Warrants
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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
Image of page 2
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.
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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.
Image of page 4
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.
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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) .
Image of page 6
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. Unlike an option which allows you to “opt out”, a futures or forward contract commits the owner to a futures action.
Image of page 7

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
2009 EFN406 Managerial Finance 8Slide 8 Forward Contract This transaction is called a forward contract if it is performed privately between the two parties.
Image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern