Chap_22_Saunders7e_SLIDES

Chap_22_Saunders7e_SLIDES - Ch-22 Futures/Forwards...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Ch-22 Futures/Forwards OverviewDerivative securities have become increasingly important as FIs seek methods to hedge risk exposures. The growth of derivative usage is not without controversy since misuse can increase risk. This chapter explores the role of futures and forwards in managing interest rate risk, FX risk, credit risk, and catastrophe risk.22-1Futures and ForwardsThird largest group of interest rate derivatives in terms of notional contract volumesSwaps are the largestOptions second largestContracts are held not only for hedging purposes, but FIs also serve as counterparty for other firms wishing to hedge on balance sheet risks22-2DerivativesRapid growth of derivatives use has been controversialBankers Trust, Allfirst Bank (Allied Irish)As of 2000, FASB requires that derivatives be marked to market Transparency of losses and gains on financial statementsLate 2000s, major changes:Federal regulation and policing by SEC22-3Spot and Forward ContractsSpot contractAgreement at t = 0 for immediate delivery and immediate paymentForward contractAgreement between two parties to exchange an asset at a specified future date for a price which is set at t = 0Counterparty risk OTC, but secondary markets have developed for forward contracts22-4Futures ContractsFutures contract similar to a forward contract except:Marked to marketStandardized contractsSmaller denomination than forwardExchange traded Rapid growth of off market trading systemsLower default risk than forward contractsDelivery of underlying asset seldom occurs22-5Off-market TradingTerms of futures contracts traded in the U.S. are subject to regulatory approval of Commodities Futures Trading Commission (CFTC)Rapid growth in off-market trading between institutional investors22-6HedgingInterest Rate RiskExample: 20-year $1 million face value bond. Current price = $970,000. Interest rates expected to increase from 8% to 10% over next 3 months. over next 3 months....
View Full Document

Page1 / 28

Chap_22_Saunders7e_SLIDES - Ch-22 Futures/Forwards...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online