Derivatives Question (1 Viewer)

[aussiechica]

Hey Hsc Bunnies!

Argh! My exam is Tom, and I thought I had a good grasp on everything, but derivatives are making my brain hurt

I have 2 diff textbooks that I get my notes on ( the Leading Edge one, which everyone says is shit, but I like becaue it keeps things simple & Nelson, which I think most ppl use), as well as other ppls notes. Anyhow, when it comes to derivatives, theyre both saying different things and I dont know what to believe!

So if someone could clear up these few points Id be so grateful

1) First off, Derivatives do = Hedging Tools, right?

2) Everyone seems to be calling futures different things. Are 'futures' and 'currency futures contracts' the same thing?

Also, can ppl explain to me clearly the difference between futures and forwards and currency awaps, Im a bit confused

Also, which hedging tools do we need to know (is the key four- forwards, futures, options and swaps) enough, or should we all know exposure netting and spot hedging and transfer pricing too?) ie. how deeply are we required to go into hedging. As you can prolly tell, I fimd this particular bit really confusing, so any help is appreciated

Thankyou!

 

[truly-in-bliss]

1. There are 2 types of hedging: natrual and fiancial instrument hedging. Derivatives is one example of financial instrument hedging.


2. yeah it is confusing huh?

in the simplest sense yes. But to call futures *currency future contracts* is a bit incorrect because futures contrcts invovle the buy and sell fo commodities, security or financial isntruments, hence not just currency. Hence futures = future contracts.

There are other distinctions between foward exchange contracts and future contracts. however, i don't think that is required of the syllabus and it will just confuse you even more. Plus according to the syllabus and various textbooks

foward contracts = future contracts. it is sometiems called *foward exchange contract* as well. This is because it is traded in dollar terms.

Options are lyk forward exchange contracts excpt:
- there are not bidning. ie: if i told u i am gonna buy ur table next wed and then change my mind, you can't sue meeh

Swaps are an agreement to exchange one currency for another, and then in the future they swap it bk.

aniwayz there are 3 types of derivatives:

1. forward contracts = futures
- legally binindg
- invovles the echange of commodities, currencies etc.
- the exchange between 2 parties takes someitmes in the future.
- paid in currencies


2. options
- not legally binding
- the buyer has no obligation to exchange with the seller in the future
- paid in terms of commodities, currencies or anything


3. swaps
- trade currency for currency
- the contract also invovles both parties to return the currency loan in the future

hope that helps...

*yawns*.....need coffeeee...

 

[truly-in-bliss]

yeah know 4 if u know the diff betwwen fowardds and futures.......but if u dont...just think of fowards as futures......ie; know 3 of them...

 

[aussiechica]

Thanks! That was most useful. However , you mentioned something about natural hedging.
Ive never heard of this before- what is it and do we need to know it?

Thanks alot

 

[truly-in-bliss]

natrual hedgins are lyk hedign without resorting to financialinsturment hedgin, there are things that nay busienss would do to minimise the effect of global market fluctuations. eg:

- implement marketing strategies that reduce the sensititvity of exprted products.
- import and export contracts to be conducted in aussie dollar...(cuzour dollar is relatively more stable than say Argentina's)
- establish subsidaries/factories offshore to elminate the exposre to foreign exchange.....

 

[aussiechica]

Oh right then, thanks!!
Those are in my books, they just dont call them 'natural hedging'

Thanks dahlink!