Share
Explore BrainMass

Trading Issues and Basics of Forward and Futures Contracts

5 Paragraphs:
Because of new information that has been gathered on derivatives, it has become apparent that these instruments are capable of providing a good hedge mechanism for various currency transactions in which the firm will engage. Because of the potential importance of derivatives, the treasurer would like more information on futures contracts. He needs you to provide explanations for the following questions:

* What is the difference between a contango market and a backwardation market
* What exactly is meant by a basis?
* Are there any ethical concerns that need to be addressed when using derivative instruments?
___________________________________________________________________________________
8-10 slides:
Chief Executive Officer (CEO) Barbara Kline has requested that you create a PowerPoint presentation detailing the differences between using forward contracts and options contracts to reduce risk. She wants to know if there are any advantages to using one of the instruments over the other. Is one of these more effective than the other? Are the costs of each different? Calculate how many call options contracts would be needed if you were trying to hedge a portfolio of 1,000 shares of stock. The answers to these questions will have an effect on the bottom line of the firm. Provide concrete explanations of each and create examples where it would be more appropriate to utilize an options contract over a forward contract and vice versa. Your presentation should be between 8-10 slides.

Solution Preview

5 Paragraphs:
Because of new information that has been gathered on derivatives, it has become apparent that these instruments are capable of providing a good hedge mechanism for various currency transactions in which the firm will engage. Because of the potential importance of derivatives, the treasurer would like more information on futures contracts. He needs you to provide explanations for the following questions:

What is the difference between a contango market and a backwardation market
As per Investopedia, " Contango is when the futures price is above the expected future spot price. Because the futures price must converge on the expected future spot price, contango implies that futures prices are falling over time as new information brings them into line with the expected future spot price." On the other hand " Normal backwardation is when the futures price is below the expected future spot price. This is desirable for speculators who are "net long" in their positions: they want the futures price to ...

Solution Summary

Response explains trading Issues and Basics of Forward and Futures Contracts

$2.19