Too Many Derivatives from Which to Choose Essay Example | Topics and Well Written Essays - 500 words

Too Many Derivatives from Which to Choose - Essay ExampleThe latter(prenominal) ii methods are called as derivative markets. In this case the management does non take into score hedging victimization forward currency contracts as the banks have increased the charges for these services manifold. Hedging using forward contracts simply transfers the risk from the wet to the bank and hence the bank charges a large bill for these services. Now the management has to decide between currency future and options.The future currency contract is a legal contract between a subverter and a seller in which they agree to buy or sell the currency at a future date, at an exchange rate that is furbish up or agreed upon today. Though the future contract looks very similar to forward contract, the futures contract brings in to a greater extent liquidity it is traded in the futures market. It is similar to share market. The most important benefit of futures contract is that firm can release itself f rom the futures obligation by buying the contract even before the contract expires. otherwise benefits include liquidity, leverage and convergence of the futures price and spot price on the day of expiration of the futures contract.A currency option is a contract between a emptor and a seller where the buyer of the option enjoys the right but not the obligation to buy or sell the currency at a specified exchange rate before a specified date. There are two types of options. They are call option and arrogate options. Call option gives the buyer the right to buy and the put option gives the buyer the right to sell the currency. Options minimize the risks to a great extent. This hedging option is not of significant importance to our book firm as the option is mainly beneficial for firms bidding for afield projects. Options are highly flexible and offer a wide range of strategies. But they are more expensive when compared to forwards or futures contract. Hence the most suited derivat ive for the book firm is futures contract.The exceed