This essay aims at explaining futures and forward contracts, describing their origins and purpose of usage as well as regulatory requirements. Moreover, it discusses advantages and disadvantages.
Futures and forward contracts are financial instruments. More specifically, they are derivatives. Derivatives are financial contracts that derive their value from an underlying asset (Hirsa & Neftci, 2014). The literature distinguishes between physical commodities, such as corn or precious metals, and financial instruments, for example bonds, stocks or currencies, as underlying assets (Gottesman, 2016). Futures and forwards are agreements to buy or sell the underlying at a precise time in the future for a specified price, strike price. Their difference is that futures are traded on an exchange, whereas forwards are traded in the over-the-counter (OTC) market, meaning off-exchange trading directly between two parties (Hull, 2016). Consequently, futures are standardized, whereas forwards can be privately negotiated.
Table of Contents
- 1. Introduction
- 2. Main characteristics of futures and forward contracts
- 3. History of origins and purpose of usage
- 4. Benefits
- 5. Comment on potential dangers and failures
- 6. Regulation of futures and forward contracts
- 7. Conclusion
Objectives and Key Themes
This report aims to illuminate the key features of futures and forward contracts, tracing their historical development and practical applications. It also examines the regulatory landscape governing these instruments, alongside their advantages and disadvantages.
- Characteristics of futures and forward contracts
- Historical context and uses of futures and forward contracts
- Regulatory frameworks for futures and forward contracts
- Advantages and disadvantages of futures and forward contracts
- Practical application and examples of futures and forward contracts
Chapter Summaries
1. Introduction: This introductory chapter sets the stage for the report, outlining its objective to explore the main characteristics, history, and usage of futures and forward contracts, along with their regulations, benefits, and drawbacks. It serves as a roadmap for the subsequent detailed analysis of these financial instruments.
2. Main characteristics of futures and forward contracts: This chapter delves into the definition and core attributes of futures and forward contracts, classifying them as derivative financial instruments whose value is derived from an underlying asset. The chapter distinguishes between futures, traded on exchanges and characterized by standardization, and forwards, traded over-the-counter (OTC) and offering greater flexibility for private negotiation. It highlights the significant volume of OTC derivatives compared to exchange-traded ones, using data to illustrate the scale of these markets. A key differentiating factor explained is that unlike options, futures and forwards are binding obligations for both buyer and seller. The chapter also touches upon the use of these instruments for hedging, speculation, and arbitrage.
3. History of origins and purpose of usage: While the provided text lacks a dedicated section detailing the historical origins and purpose of usage, the context within the “Main characteristics” section implicitly suggests an understanding of their evolution within the broader financial landscape. The description of their use for hedging, speculation and arbitrage indirectly references the historical development and reasons for their creation and adoption. Further, the reference to various authors and their works implicitly points to a historical progression and changing understanding of these instruments. This section would likely delve into the evolution of these contracts from basic trading agreements to the sophisticated instruments they are today, exploring the influence of market forces, regulatory changes, and technological advancements.
Keywords
Futures contracts, forward contracts, derivatives, hedging, speculation, arbitrage, financial instruments, regulatory frameworks, exchange-traded, over-the-counter (OTC), underlying assets, risk management.
Frequently Asked Questions: A Comprehensive Language Preview of Futures and Forward Contracts
What is the purpose of this report?
This report aims to provide a comprehensive overview of futures and forward contracts. It explores their key characteristics, historical development, practical applications, regulatory frameworks, advantages, and disadvantages.
What topics are covered in the report?
The report covers the following key areas: characteristics of futures and forward contracts; historical context and uses; regulatory frameworks; advantages and disadvantages; and practical application and examples. The report includes an introduction, chapter summaries, and a conclusion, along with a list of keywords.
What are the main characteristics of futures and forward contracts?
Futures and forward contracts are derivative financial instruments whose value is derived from an underlying asset. Futures are standardized and traded on exchanges, while forwards are customized and traded over-the-counter (OTC). A key difference is that, unlike options, futures and forwards represent binding obligations for both buyer and seller. They are used for hedging, speculation, and arbitrage.
What is the historical context of futures and forward contracts?
While the provided text doesn't explicitly detail the historical origins, it implicitly suggests an understanding of their evolution within the broader financial landscape. The discussion of hedging, speculation, and arbitrage hints at their historical development and reasons for adoption. The evolution from basic trading agreements to sophisticated instruments, influenced by market forces, regulatory changes, and technological advancements, would be covered in a fuller treatment.
What are the benefits of using futures and forward contracts?
The report highlights that futures and forward contracts offer benefits related to hedging, speculation, and arbitrage. The specific advantages are not detailed in the provided preview.
What are the potential dangers and failures associated with futures and forward contracts?
The potential dangers and failures associated with these instruments are mentioned but not detailed in the preview provided. This would likely be discussed in a full version of the report.
How are futures and forward contracts regulated?
The report indicates that the regulatory frameworks governing futures and forward contracts are a significant topic of discussion, but details of specific regulations are absent from this preview.
What are the key takeaways from each chapter?
The report offers summaries for each chapter. Chapter 1 introduces the topic. Chapter 2 details the characteristics of futures and forwards. Chapter 3 (implied) would cover the historical context and development. Subsequent chapters (not fully detailed) would delve into benefits, risks, and regulatory frameworks.
What keywords are associated with this report?
The keywords include: Futures contracts, forward contracts, derivatives, hedging, speculation, arbitrage, financial instruments, regulatory frameworks, exchange-traded, over-the-counter (OTC), underlying assets, risk management.
- Quote paper
- Vivien Barth (Author), 2019, Futures and forward contracts. Main characteristics, regulatory requirements, Munich, GRIN Verlag, https://www.grin.com/document/513250
