FINS5512 Chap.8 Futures and Forwards
Futures and Forwards
The current Term Planner names Derivative Markets I, but the course materials available here contains no current Week 8 lecture or workshop. This chapter therefore stays with the supported contract boundary: a derivative takes value from an underlying asset and can manage or create exposure, while a forward fixes a later exchange rate today.
The method maps underlying, amount, price, date, obligation and hedge direction without inventing futures-specific course rules. Keep missing Week 8 conventions explicitly blank until current course informations establish them.
Treat this chapter as a contract-reading bridge until the current Week 8 materials are available.
Put the underlying commercial cash flow first and record currency or asset, amount, date and direction. Then place the derivative beside it and identify underlying, quantity, agreed price, settlement date and each party obligation. A hedge needs opposing cash-flow directions in compatible units and dates.
A contract that is larger, later or tied to a different basis leaves residual exposure; without an underlying position it can create speculation rather than reduce risk. For a fixed foreign-currency payable, buying that currency forward can lock the home-currency conversion rate. For a receivable, the direction reverses.
Partial coverage may be a deliberate choice rather than an automatic error, but the remaining amount should be quantified and linked to forecast reliability, cost and risk capacity. A fixed contract replaces rate uncertainty for the matched amount; it does not make the commercial purchase profitable or remove counterparty and operational risk.
The current planner routes Week 8 to derivative readings, yet the course materials available here contains no current lecture or workshop that establishes futures-specific margin, settlement, formula or assessment conventions. Keep those fields open in the formula sheet and complete them from Moodle when released.
Record any future convention beside its source and test it with fresh numbers before adding it to a final-review sheet. The evidence boundary is part of sound revision: it prevents a familiar rule from another course being attached to this offering under a different quote or contract convention.
What this chapter covers
- 01
Derivative value linked to an underlying
- 02
Contract date and settlement date
- 03
Underlying, quantity, price and maturity
- 04
Commercial exposure before hedge selection
- 05
Forward direction for receivables and payables
- 06
Residual amount and timing risk
Worked example · free
Lock a foreign-currency payable
- +1The commercial position is a fixed future USD payable.
- +1The importer should buy USD forward for home currency.
- +1The contract amount should match USD 80,000.
- +1The settlement date should match the payment date to limit timing exposure.
Key terms
- Underlying asset
- The asset or variable from which a derivative's value is derived.
- Forward contract
- An agreement today for an exchange at a specified later date and rate.
- Residual exposure
- The unmatched amount, date or basis left after a proposed hedge.
Futures and Forwards FAQ
Why is this chapter cautious about futures mechanics?
The current Term Planner names the topic, but the current Week 8 lecture and workshop files are not included in the course materials available here. Claiming a particular margin rule, formula or exam format would therefore exceed the available course-specific evidence.
How do I choose forward direction for a payable?
A payable means the business will need the foreign currency later, so it buys that currency forward. A receivable points the other way: the business expects to receive foreign currency and can sell it forward.
Can a forward remove every source of risk?
A well-matched forward can replace exchange-rate uncertainty on a fixed cash flow, but amount, timing, basis, counterparty and forecast uncertainty may remain. A mismatch can leave residual exposure or create an unmatched position.
Exam move
Use the current Term Planner as a route, not as permission to invent missing detailed teaching. Start with the non-derivative commercial position and write its currency, amount, date and direction. Then place the forward contract beside it and confirm the arrows oppose. Check whether the amount and settlement date match; any difference becomes residual exposure.
Learn the distinction between a hedge and speculation from the presence of an underlying exposure rather than from the product name. Keep a blank section in your formula notes for futures-specific margining, settlement and contract conventions until the current Week 8 material appears on Moodle. When it does, add only the course's stated relationships and practise with newly authored numbers.
Do not claim the materials available hered prior mid-term establishes a Week 8 or final derivative question format, because it covers earlier topics. For every contract scenario, underline underlying, quantity, price and date before reaching a conclusion.
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