FINS1612 Lecture Notes - Lecture 10: Interest Rate Risk, Futures Contract, Futures Exchange
Document Summary
Chapter 19 futures contracts and forward rate agreements. Learning objectives: what are they, what are the differences between them, who uses them, how to use them and the risks, able to use fra & futures to hedge interest rate risks. What are futures and fras: by definition: Hedging potential drop in wheat price: example: a farmer wants to sell wheat in a couple of months, but is concerned that the price is going to fall in the mean time. How can the farmer hedge this price risk: solution: Enter into a wheat futures contract to sell. If wheat prices fall, the futures contract will rise in value, offsetting the loss in the physical market from the fall in the wheat price. If wheat prices rise, the futures contract will fall in value, offsetting the gain in the physical market from a rise in the wheat price.
