The following things: Net exposure If you want to hedge several positions, it is advisable that you first calculate the net exposure. This results from a comparison of liabilities and claims (sorted by currencies and due dates).The balance (the net exposure) is used for hedging. Otherwise, you would hedge each position individually which is very complicated. Risk evaluation Value at […]
A hedge is perfect once the folowing condition is met: Price change on the spot market (of the security you want to hedge) – Price change on the futures market ( of the contract you use for hedging) = 0 However in reality it’s hardly possible to achieve a perfect hedge. There are several reasons why that’s the case: If […]
When doing a hedge one usually intends to secure a spot market position with a counteracting position on the derivatives market. The concept of hedging is usually based on short-term decision scenarios, with the focus on eliminating market risks (eg. price risks). There are several ways to secure (hedge) a spot market position with derivatives: One could do a long […]
If you acquire a position on the spot market, the entire holding costs – primarily the financing costs – must be borne by the buyer. If, on the other hand, you choose a derivative (eg. a future), then the purchase obligation and consequently also the financing requirement is postponed. Therefore one saves the holding costs (costs of carry). For that […]
Buyers, as well as sellers of derivatives on a futures exchange, commit themselves not to each other. Instead, they commit to the Clearing House. Therefore neither sellers nor buyers need to check the creditworthiness of their counterparties as the Clearing House guarantees the transactions. The transaction guarantee is secured by regulatory requirements as well as the margin requirements of market […]
There are 3 main reasons for trading futures: Hedging By hedging one intends to transfer the risk of future price fluctuations to other market participants. There are two kinds of hedges: One would be a short hedge in which the investors hold positions from the spot market and holds the counterpositions from the derivatives market. With a short hedge, the […]
Depending on what one expects oft the market one can either open a long or short position: Long position: The purchase of a future at the price of 1 Euro means the obligation to purchase the underlying at a later date (eg. 1.2.2024) at the price of 1 Euro. Short position: The sale of a future at the price of […]
In the case of Financial Futures, the underlying for the Future is not a commodity or a good instead it’s a security, indices, or another instrument like interest rates. Futures are regulated with regard to the delivery amounts of their underlings. In the case of Commodity Futures, the underlying is a commodity or resource.
Warrants and Options are very similar. The buyer of the warrant has the right to buy (in case of a call warrant) or sell ( in case of a put warrant) an underlying asset within an predetermined price. For that right the buyer pays an predeterminded premium (price) to the seller. However there are some differences:
Futures transactions can be conditional or unconditional. In an unconditional futures transaction, both sides (seller and buyer) are obliged to fulfill their part of the transaction. In a conditional transaction the holder of the option has the right (but not the obligation) to buy or sell the underlying.