Part 5 - Forward, futures and spot Flashcards
Advantages futures contract (3)
Liquidity: Futures are traded on exchanges, providing high liquidity and easier entry and exit.
Standardization: Contracts are standardized, facilitating ease of trading and understanding.
Hedging: Investors can hedge against price fluctuations in the underlying asset.
Disadvantage futures contract (2)
Market Volatility: Futures can be highly sensitive to market changes, leading to rapid gains or losses.
Margin Calls: If the market moves against a position, traders may face margin calls, requiring additional capital.
Advantages spot (2)
One of the major advantages of spot rates is their immediacy and transparency. They provide real-time information about the value of currencies, enabling businesses and individuals to make instant decisions on currency conversions. Moreover, spot rates are widely used for day-to-day transactions, such as buying goods or services from foreign suppliers
Disadvantage spot
However, the downside of spot rates is their volatility, as they can change rapidly due to various factors like economic indicators, geopolitical events, or central bank interventions.
Why may someone want a swap contract?
Liquidity needs - can swap loans in two different countries so you can basically invests in another currency
or speculation in new markets possibly
forward contract define
non-standardized agreement
forward contract advantage (2)
Customizable terms: Parties can tailor the contract specifics to their needs, including the quantity of the asset and settlement date.
No upfront cost: Generally, there are no costs for entering into a forward contract, making it accessible.
forward contract disadvantage (2)
Counterparty risk: There is a higher risk that the other party may default since there is no clearinghouse to guarantee the contract.
Lack of liquidity: Since these contracts are private and specific to the parties involved, they cannot be easily traded or exited before expiration.
