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Derivatives

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Derivatives

  • This topic has 1 reply, 2 voices, and was last updated 8 years ago by John Moffat.
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  • December 7, 2016 at 12:13 pm #354972
    Muslim Farooque
    Member
    • Topics: 190
    • Replies: 134
    • ☆☆☆

    Sir if u were generally compare options futures forwards, what are advantages of each , and are options always the best?

    December 7, 2016 at 2:30 pm #355034
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54701
    • ☆☆☆☆☆

    I do deal with this in my free lectures on foreign exchange risk management and I am not going to type out all my lectures here!!
    (and options are certainly not always the best!!!!!)

    Forward rates fix the amount – so no risk – but are best for small amounts because of the banks commissions.
    Money market hedging is the same as forward rates – but only feasible with large amounts.
    Both forward rates and money markets apply on a fixed transaction date, the beauty of futures is that you can stop the deal on any date – you are not tied to a fixed date. However because of contracts sizes they are only suitable for large amounts, and because of fixed sized contracts and basis risk, the risk is not completely eliminated.

    Options are good when you think the rate will move in your favour but want protection (insurance effectively) against it moving against you. The downside is the premium payable which will effectively have been wasted if the exchange rate moves in your favour and therefore they are not exercised.

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