Why are Future/Option contracts necessary if Forwards exist?
Not what you're looking for?
Given that the forward market already existed, why was it necessary to establish currency futures and currency options contracts?
Please discuss in detail and provide at least 2 references for your answer.
Purchase this Solution
Solution Summary
500 words, APA format with references.
Solution Preview
Futures and forwards operate very differently and serve very different clientele. In general, a forward market serves customers that require transfer of a commodity-in this case, currencies. A forward contract hedges exchange rate risk, locks in favorable rates, etc... the bottom line is that a forward contract exists to transfer the good-not to speculate on values. Options and futures, however, focus on the fluctuation of the underlying commodity-and are specifically designed to capture a liquid method for trading these values.
Closing a futures position refers to the (very common) practice of taking an equal and opposite position in order to avoid having to take or make delivery of the commodity in question.
"For example, speculators who purchased Treasury bond futures contracts could sell similar ...
Purchase this Solution
Free BrainMass Quizzes
Income Streams
In our ever changing world, developing secondary income streams is becoming more important. This quiz provides a brief overview of income sources.
Marketing Research and Forecasting
The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.
Learning Lean
This quiz will help you understand the basic concepts of Lean.
Cost Concepts: Analyzing Costs in Managerial Accounting
This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.
Transformational Leadership
This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.