Derivatives – Forward Contracts

Learn about the Derivative market and understanding the forward contracts and its relationship with interest rates

Description

The course discusses about the Derivative market and understanding the forward contracts and its relationship with interest rates. This training are for all those who are new to forward contracts but want a deeper understanding of them and how they work with practical examples.

The training will include the following;

Introduction to Forwards

Relationship between Interest rate and Forwards

Determination of Forward price

Commodity Forwards

Foreign Exchange Risk

A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date. A forward contract can be used for hedging or speculation, although its non-standardized nature makes it particularly apt for hedging. A forward contract, often shortened to just forward, is a contract agreement to buy or sell an asset at a specific price on a specified date in the future. Since the forward contract refers to the underlying asset that will be delivered on the specified date, it is considered a type of derivative.

A forward contract is an agreement between two parties to trade a specific quantity of an asset for a pre-specified price at a specific date in the future. Forwards are very similar to futures; however, there are key differences. A forward long position benefits when, on the maturation/expiration date, the underlying asset has risen in price, while a forward short position benefits when the underlying asset has fallen in price.

Advantages of forward contracts:

High degree of customisation: Forward contracts can be customised to suit the requirements of the parties involved.

No margin requirement: While trading in forward contracts, no prerequisite margin is required.

Risks involved in forward contracts:

Counterparty risk: If either of the parties involved decline to honour the contract, the deal will not be completed. This is known as the counterparty risk.

No regulator: This is an over-the-counter (OTC) agreement, and there is no third-party regulator involved. Simply put, there is no one to hold both the parties accountable.

In order to overcome the risk associated with forward contracts, future contracts were introduced.