Futures, forwards and options are used for risk reduction, speculation Essay

Futures, forwards and options are used for risk reduction, speculation and arbitrage purposes - Essay Example will, however focus on three derivatives only; futures, forwards, and options contracts and evaluate their roles in risk reduction, arbitrage purposes, and speculation. Futures are also known as futures contracts in finance. By definition, a futures contract is one that is standardized and features two different parties who agree to buy and/or sell a specific asset with a standard quality and quantity for a price that is agreed on before the actual delivery and payment occurs. However, the delivery and payment day, which occurs on a future date is specified and fixed, and is referred to as the â€Å"delivery date† (Suitcliffe 2006, p. 19). For instance, one may need to buy a specific make of an asset, such as a Smartphone that happens to be out of stock at a certain shop. Owing to the fact that he needs that one make of the phone, they can come to terms with the proprietor that he imports the phone from elsewhere, then sells it to the buyer later for a price that they agree on at that current time. This contract’s negotiation takes place at a futures exchange. A futures exchange or market is itself a neutral financial exchange in whic h trades of standardized futures occur. In short, a futures market acts as an intermediary between the buyer and seller and sees to it that they come to an agreement regarding the exchange of commodities or financial instruments at a certain time with a specific future delivery time (The Telegraph 2014). The party willing to acquire an underlying asset in a later time (future) is called the buyer of the futures contract, whereas the party willing to sell the same is called the seller of the contract. Since the buyer of the contract has the permission to make a deal and await delivery without any variations to the price, he is referred to as â€Å"long†. The seller on his part who has the mandate to deliver the asset on the specified date without altering the price to the buyer is referred to as â€Å"short†. A futures contract, with

FMRI Management Coursework Example | Topics and Well Written Essays - 1000 words

FMRI Management - Coursework Example There are many products provided by banks and other financial intermediaries to the customers for long-term motives. Some of the prominent provisions of services include term deposit and comparable accounts, which allows consumers to make very safe and appealing investment (Padmalatha 2011). It is because a defined period of money drawl is beneficial as it returns back higher rate and it is a low risk investment compared to demand deposit. Financial intermediaries give consumers an opportunity to utilize bonds and quoted shares as currency to start up a small business (Padmalatha 2011). In addition, banks also facilitated their customers with the opportunity of invested funds through fair means under the supervision of concerned authoritative bodies. Skilled and efficient managers are responsible for the security of invested fund to ensure banks as most trustworthy organizations for the consumers.Life insurance is another important policy of financial intermediaries to serve people o f the society. It is a long-term service, specifically an important financial security for family (Padmalatha 2011). It can aid a family during crucial stages of life, such as marriage, health care, or education of children. It is a vital tool of protecting family and children in financial terms. A pension policy is another very significant service for the citizens (Padmalatha 2011). It is considered a complementary plan for the public provided by employers of the organization to their employees after retirement or death. This policy allows family of an employee to receive a fix amount from the salary, through the whole life on a monthly basis. These are some of the most advantageous long-term services, provided by retail banks or non-bank financial intermediaries (Padmalatha 2011). Implications of Increased Interest Rates: Increase in interest rate pulls down inflation. However, more than investors get benefit with the increased interest rates. It is so because an increase in inter est rate also increases the worth of loan. Ultimately, the worth of pension and bond fund increases. It provides an outstanding benefit to those who depends upon pension and other funds for their monthly income (Cummings 2010). This condition attracts more people towards saving funds rather than spending their money, because everyone is well aware of the facts, which can bring gain to them. Thus, during the season of higher interest rate, rate of individuals` investment increases in the banks. Moreover, in this situation risk premium is also provided, which usually gets flatten during low interest rates (Cummings 2010). In addition, not only citizens, but foreigners also tend to show their interest in investment in the state, where interest rate increases and benefits investors with high rate of returned amount. Furthermore, it has been observed that it results in stronger currency and puts higher demands of currency (Cummings 2010). As a result, countries take advantage from curren cies of other states and citizens enjoy lower rate of good and products of daily use such as petrol and other food items. Additionally, in this season governmental bodies of the country buy back bond on low cost (Cummings 2010). In short, it could be said that investors look for more advantages than disadvantages of the season because it is beneficial for saving money, but not for investments. Risk to Commercial Banks: Commercial banks gain a return towards shareholder only when the organizers successfully