Derivatives such as futures, forwards and options can be valuable tools within any portfolio. They can be used to reduce portfolio risk, toartificially diversify portfolio holdings, to hedge against various types of risks and to improve revenue within a portfolio. As we can see, derivatives are very flexible instruments that provide investorswith the ability to be more creative in their derivative investment choices.
Financial Instruments Investment:
A forward contract—or forward—is an OTC derivative. In its simplest form,it is a trade that is agreed to at one point in time but will take place at some later time.
• Forward contracts can help reduce volatility in certain markets, but they contain the risksinherent to all speculative investing.
• These contracts may be sold on the secondary market, but the person holding the contract at its end must take delivery of the underlying asset.• Forward contracts are identical to futures contracts except that their provisions are not standardized.
There is a forward contract negotiation between the GBp/USA exchange currency rates.The contract is stated as a short position, it is implied that the contracts were agreed to be old as and the underlying asset at an specified time.
A short forward was established becausethere was an expectation of the prices to fall down. In the first case, the investor is obliged to sell British pounds at a rate of 0.784 so:
Exchange rate: 0.784
A)0.785(0.785-1500)*1000000 = -$1000 Loss
B) 0.783 (0.784-0.783)*1000000=$1000 Profit
C) 0.782 (0.784-0.782)*1000000=$2.000 profit
D) 0.77(0.784-0.77)*1000000=$14.000 profit
Aderivative that specifies a contract between two parties for a future transaction on an asset at a reference price (the strike). The buyer of the option gains the right, but not the obligation, to...