ch10 (5) - Derivatives Derivatives are contracts with...

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Derivatives Derivatives are contracts with pricing derived from the spot rate. Derivatives allow investors to trade foreign exchange for delivery at different times and at different contingencies. In general, derivatives allow investors to alter payoffs, affecting the risk associated with his/her collection of investments (e.g., portfolio). Hedging: risk reduction Speculation: risk taking. Types: forwards , swaps , futures , and options . Forwards A and B agree to trade currencies at set price on the settlement date. Contract cannot be traded to third parties. The settlement date can be in one month, 3 months, 6 months, or 1 year. Swaps A and B agree to trade at set price today and do reverse trade at a set price in the future. Swaps combine two contracts (a spot and a forward) into one, taking advantage of lower transactions costs. Futures A and B agree to trade currencies at set price in the future. Either side of contract can be traded to third parties C, D, E,… (on exchanges). Parties
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ch10 (5) - Derivatives Derivatives are contracts with...

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