Forward/futures contracts For the selected instrument can you please provide the
ID: 2616109 • Letter: F
Question
Forward/futures contracts
For the selected instrument can you please provide the following:
A detailed explanation of the instrument
How it can be used as part of a hedging program
Limitations of the instrument
The regulatory environment surrounding this instrument included required disclosures, etc.
How this instrument is priced.
The goal of this project is to provide a comprehensive overview of this specific instrument that could be used as a user’s guide for future risk management professionals as they consider the use of this instrument as part of their financial risk management strategy.
Explanation / Answer
Forward or futures contract is the financial contract between two parties which gives rise to the obligation that the other party will buy the underlying asset at the price given in the contract in future.
It is a hedging instrument as it helps the first party to get the money from the other party by creating the obligation to buy the asset at the price decided.
The limitations are that forward contracts are non standardized contracts where as future contracts are dtandardized. The forward contracts are settled privately whereas future contracts are settled through a centralized exchange system.