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Sir John, Please help me with the following doubts that I am having! I would be really really thankful to you 🙂
1) Is it true that Forward contracts, FRA, Futures, Options, Swaps are all DERIVATIVES and they all are used to hedge foreign currency risk BUT not interest rate risk? OR derivatives can be used for both Foreign currency risk as well as Interest rate risk?
2) Are these also DERIVATIVES [forward rate agreements, interest rate guarantees, interest rate futures, interest rate options] apart from [Forward contracts, FRA, Futures, Options, Swaps]. I am deeply confused here!
3) Is it also correct that “Invoicing in home currency, Leading & lagging, Netting and Matching” are all hedging techniques used to hedge foreign currency risk [because they are all mentioned in the Foreign Currency Exchange risk – chapter 23 of your notes] BUT not in interest rate risk? They are the separate hedging methods apart from Forward contract & Money market hedging [In exam can we be asked about these other methods with the calculations?]
4) Regarding Interest rate risk movement (chapter 24 of notes) we will only be required to asked or to do calculation on Forward rate agreements (FRA) only and nowhere else we are required to do any calculation like in forward rate agreements, interest rate guarantees, interest rate futures & interest rate options?
Are you using the lecture notes on their own, or are you also watching the free lectures that work through the lectures notes? Using the notes on their own is a complete waste of time because they are lecture notes, and it is in the lectures that I work through the examples and explain and expand on the notes. If you are not watching the lectures for any reason then it is essential that you buy a Study Text and study from there – the notes without the lectures are not going to enable you to pass the exam.
1. Derivatives are financial instruments that get their value from something else. E.g. the value of exchange rate futures derives from the the actual exchange rates.
Futures are derivatives. Forward contracts, FRA’s, options and swaps are not derivatives.
FRA’s are nothing to do with foreign exchange risk – only interest rate risk. Foreign exchange futures and interest rate futures are both derivatives.2. See my answer to (1). However as far as the exam is concerned it is irrelevant which are and which are not derivatives (apart from just knowing what the word means if asked – it is never relevant for calculations).
3. Correct, as explained in details in my lectures.
4. Correct, as again explained in detail in my lectures.
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