University Lucian Blaga, Sibiu

English
portfolio

Teacher:
Conf. Univ. Dr. Vintean Adriana
Student:
Boboc Raluca Andreea
Finance-banks
Year 2
Group 1
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Progress test
1. What is an exchange rate?

The price of a nations currency in terms of another currency. An exchange

rate thus has two components, the domestic currency and a foreign currency,
and can be quoted either directly or indirectly. In a direct quotation, the price of
a unit of foreign currency is expressed in terms of the domestic currency. In an
indirect quotation, the price of a unit of domestic currency is expressed in terms
of the foreign currency. An exchange rate that does not have the domestic
currency as one of the two currency components is known as a cross currency, or
cross rate.

2. Explain what is the appreciation and depreciation of currency?

The depreciation of a country's currency refers to a decrease in the value

of that country's currency. For instance, if the Canadian dollar depreciates
relative to the euro, the exchange rate (the Canadian dollar price of euros) rises:
it takes more Canadian dollars to purchase 1 euro (1 EUR=1.5 CAD 1
EUR=1.7 CAD).
The appreciation of a country's currency refers to an increase in the value
of that country's currency. Continuing with the CAD/EUR example, if the
Canadian dollar appreciates relative to the euro, the exchange rate falls: it takes
fewer Canadian dollars to purchase 1 euro (1 EUR=1.5 CAD 1 EUR=1.4 CAD).
When the Canadian dollar appreciates relative to the Euro, the Canadian dollar
becomes less competitive. This will lead to larger imports of European goods and
services, and lower exports of Canadian goods and services.

3. List at least 8 types of foreign exchange rates and explain them.

1) United States dollar

The United States dollar (sign: $; code: USD; also abbreviated US $), is
referred to as the U.S. dollar, American dollar, US Dollar or Federal Reserve
Note. It is the official currency of the United States and its overseas territories. It
is divided into 100 smaller units called cents.
The U.S. dollar is fiat money. It is the currency most used in international
transactions and is the world's most dominant reserve currency.[15] Several
countries use it as their official currency, and in many others it is the de
facto currency.[16] It is also used as the sole currency in two British Overseas
Territories: the British Virgin Islands and the Turks and Caicos islands.
2) Euro
The euro (sign: ; code: EUR) is the currency used by the Institutions of
the European Union and is the official currency of theeurozone, which consists of
18 of the 28 member states of the European
Union: Austria, Belgium, Cyprus, Estonia, Finland, France,Germany, Greece, Irela
nd, Italy, Latvia, Luxembourg, Malta,
the Netherlands, Portugal, Slovakia, Slovenia, and Spain.[3][4]
The currency is also used in a further five European countries and
consequently used daily by some 334 million Europeans as of

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2013.[5] Additionally, 210 million people worldwide as of 2013including

182 million people in Africause currencies pegged to the euro.

3) Swiss franc
The franc (sign: Fr. or SFr. or
FS; German: Franken, French and Romansh: franc, Italian: franco; code: CHF) is
the currency andlegal tender of Switzerland and Liechtenstein; it is also legal
tender in the Italian exclave Campione d'Italia. The Swiss National Bank (SNB)
issues banknotes and the federal mint Swissmint issues coins.
The Swiss franc is the only version of the franc still issued in Europe. The
smaller denomination, a hundredth of a franc, is aRappen (Rp.) in
German, centime (c.) in French, centesimo (ct.) in Italian, and rap (rp.)
in Romansh. The ISO code of the currency used by banks and financial
institutions is CHF, although "Fr." is used by most businesses and advertisers;
some use SFr.; the Latinate "CH" stands for Confoederatio Helvetica.

4) Russian ruble
The ruble or rouble (Russian: rubl , plural rubli; see note on
English spelling) (code: RUB) is the currency of theRussian Federation and the
two partially recognized republics of Abkhazia and South Ossetia. Formerly, the
ruble was also the currency of the Russian Empire and the Soviet Union before
their dissolution. Belarus and Transnistria use currencies with the same name.
The ruble is subdivided into 100 kopeks (sometimes
transliterated kopecks, or copecks; Russian: , kopyka;
plural: , kopyki). The ISO 4217 code is RUB or 643; the former code,
RUR or 810, refers to the Russian ruble before the 1998 redenomination (1 RUB
= 1000 RUR).

5) Turkish lira
The Turkish lira (Currency sign: / (until 1 March
2012: TL); Turkish: Trk liras)[2] is the currency of Turkey and the Turkish
Republic of Northern Cyprus (recognised only by Turkey). The Turkish lira is
subdivided into 100 kuru.

6) Japanese yen
The Japanese yen ( or en?, symbol: ; code: JPY) is the
official currency of Japan. It is the third most traded currency in theforeign
exchange market after the United States dollar and the euro.[2] It is also widely
used as a reserve currency after the U.S. dollar, the euro, and the pound
sterling.

7) The United States dollar

The United States dollar (sign: $; code: USD; also abbreviated US $), is
referred to as the U.S. dollar, American dollar, US Dollar or Federal Reserve
Note. It is the official currency of the United States and its overseas territories.
It is divided into 100 smaller units called cents.
The U.S. dollar is fiat money. It is the currency most used in international
transactions and is the world's most dominant reserve currency.[15] Several
countries use it as their official currency, and in many others it is the de
facto currency.[16] It is also used as the sole currency in two British Overseas
Territories: the British Virgin Islands and the Turks and Caicos islands.

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8) The pound sterling

The pound sterling (symbol: ; ISO code: GBP), commonly known simply
as the pound, is the official currency of the United Kingdom, Jersey, Guernsey,
the Isle of Man, South Georgia and the South Sandwich Islands, the British
Antarctic Territory[6] andTristan da Cunha.[7] It is subdivided into
100 pence (singular: penny). A number of nations that do not use sterling also
have currencies called the pound. At various times, the pound sterling
was commodity money or bank notes backed by silver or gold, but it is
currently fiat money, backed only by the economy in the areas where it is
accepted.

9) Mexican peso
The peso (sign: $; code: MXN) is the currency of Mexico.
Modern peso and dollar currencies have a common origin in the 15th19th
century Spanish dollar, most continuing to use its sign, "$".[1] The Mexican
peso is the 8th most traded currency in the world, the third most traded in
the Americas (after the United States dollar and Canadian dollar), and the most
traded currency in Latin America.[2]
The current ISO 4217 code for the peso is MXN; prior to the 1993
revaluation (see below), the code MXP was used. The peso is subdivided into
100 centavos, represented by "". As of January 27, 2014 the peso's exchange
rate was $18.3763 per euro and $13.4408 per U.S. dollar [2]

4. Where is the exchange rate established?

Symbol Name 30.mai.14 29.mai.14 28.mai.14
EUR Euro 4,3986 +0.0052 4,3934 -0,0047 4,3981 +0.0023
USD Dolarul 3,2307 +0.0038 3,2269 -0,0031 3,23 +0.0094
SUA
XAU Gramul de 130,2523 +0.1540 130,0983 -1,24 131,3383 -1,5778
aur
AUD Dolarul 3,0078 +0.0062 3,0016 +0.0167 2,9849 +0.0035
australian
CAD Dolarul 2,9833 +0.0134 2,9699 -0,0056 2,9755 +0.0058
canadian
CHF Francul 3,6038 +0.0052 3,5986 +0.0030 3,5956 -0,0016
elvetian
CZK Coroana 0,1601 +0.0002 0,1599 -0,0005 0,1604 +0.0002
ceha
DKK Coroana 0,5893 +0.0007 0,5886 -0,0008 0,5894 +0.0004
daneza
EGP Lira 0,4518 +0.0006 0,4512 -0,0005 0,4517 +0.0009
egipteana

5. Explain the sterilised and unsterilised foreign exchange intervention.

Unsterilised foreign exchange

An attempt by a country's monetary authorities to influence exchange rates
and its money supply by not buying or selling domestic or foreign currencies or
assets. This is a passive approach to exchange rate fluctuations, and allows for
fluctuations in the monetary base.
If the central bank purchases domestic currency by selling foreign assets,
the money supply will shrink because it has removed domestic currency from the

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market; this is an example of a sterilized policy. An unsterilized policy allows for

the foreign-exchange markets to function without manipulation of the supply of
the domestic currency; therefore, the monetary base is allowed to change.

Sterilised foreign exchange

The purchase or sale of foreign currency by a central bank to influence the
exchange value of the domestic currency, without changing the monetary base.
Sterilized intervention involves two separate transactions: 1) the sale or
purchase of foreign currency assets, and 2) an open market operation involving
the purchase or sale of U.S. government securities (in the same size as the first
transaction). The open market operation effectively offsets or sterilizes the
impact of the intervention on the monetary base. If the sale or purchase of the
foreign currency is not accompanied by an open market operation, it would
amount to an unsterilized intervention. Empirical evidence suggests that
sterilized intervention is generally incapable of altering exchange rates.

6. List the main types of foreign exchange rate regime and explain them.
Floating rates are the most common exchange rate regime today. For
example, the dollar, euro, yen, and British pound all are floating currencies.
However, since central banks frequently intervene to avoid excessive
appreciation or depreciation, these regimes are often called managed float or
a dirty float.
Pegged floating currencies are pegged to some band or value, either fixed
or periodically adjusted. Pegged floats are:
Crawling bands : the rate is allowed to fluctuate in a band around a central
value, which is adjusted periodically. This is done at a preannounced rate or in a
controlled way following economic indicators.
Crawling pegs: the rate itself is fixed, and adjusted as above.
Pegged with horizontal bands: the rate is allowed to fluctuate in a fixed
band (bigger than 1%) around a central rate.
Fixed rates are those that have direct convertibility towards another
currency. In case of a separate currency, also known as a currency
board arrangement, the domestic currency is backed one to one by foreign
reserves. A pegged currency with very small bands (< 1%) and countries that
have adopted another country's currency and abandoned its own also fall under
this.
Dollarization occurs when the inhabitants of a country use foreign currency
in parallel to or instead of the domestic currency. The term is not only applied to
usage of the United States dollar, but generally to the use of any foreign
currency as the national currency. Zimbabwe is an example of dollarization since
the collapse of the Zimbabwean dollar.

7. What is the foreign exchange?

The exchange of one currency for another, or the conversion of one

currency into another currency. Foreign exchange also refers to the global
market where currencies are traded virtually around-the-clock. The term
foreign exchange is usually abbreviated as "forex" and occasionally as "FX."

8. What are thye major functions of the foreign exchange market?

The foreign exchange market performs the following important functions:
1. Transfer Function:

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The basic function of the foreign exchange market is to transfer purchasing

power between countries, i.e., to facilitate the conversion of one currency into
another. The transfer function is performed through the credit instruments like,
foreign bills of exchange, bank draft and telephonic transfers.
2. Credit Function:
Another function of foreign exchange market is to provide credit, both
national and international, to promote foreign trade. Bills of exchange used in the
international payments normally have a maturity period of three months.
Thus, credit is required for that period to enable the importer to take possession
of goods, sell them and obtain money to pay off the bill.
3. Hedging Function:
In a situation of exchange risks, the foreign exchange market performs the
hedging function. Hedging is the act of equating one's assets and liabilities in
foreign currency to avoid the risk resulting from future changes in the value of
foreign currency.

9. List the market participants.

There are two basic financial market participant categories
, Investor vs. Speculator and Institutional vs.Retail. Action in financial markets
by central banks is usually regarded as intervention rather than participation.

10.What represents the difference between a banks buying and selling rate?
In the retail currency exchange market, a different buying rate and selling
rate will be quoted by money dealers. Most trades are to or from the local
currency. The buying rate is the rate at which money dealers will buy foreign
currency, and the selling rate is the rate at which they will sell the currency. The
quoted rates will incorporate an allowance for a dealer's margin (or profit) in
trading, or else the margin may be recovered in the form of a "commission" or in
some other way. Different rates may also be quoted for cash (usually notes
only), a documentary form (such as traveler's cheques) or electronically (such as
a debit card purchase). The higher rate on documentary transactions is due to
the additional time and cost of clearing the document, while the cash is available
for resale immediately. Some dealers on the other hand prefer documentary
transactions because of the security concerns with cash.

11.When is the settlement made for spot deals?

The standard settlement timeframe for foreign exchange spot transactions
is T + 2 days; i.e., two business days from the trade date. A notable exception is
the USD/CAD currency pair, which settles at T + 1.

12.When is the settlement made for forward deals?

A closely related contract is a futures contract; they differ in certain respects.
Forward contracts are very similar to futures contracts, except they are not
exchange-traded, or defined on standardized assets.[2] Forwards also typically
have no interim partial settlements or "true-ups" in margin requirements like
futures such that the parties do not exchange additional property securing the
party at gain and the entire unrealized gain or loss builds up while the contract is
open. However, being traded over the counter (OTC), forward contracts
specification can be customized and may include mark-to-market and daily
margin calls.

13.What are the swap deals?

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A swap is a derivative in which two counterparties exchange cash flows of

one party's financial instrument for those of the other party's financial
instrument. The benefits in question depend on the type of financial instruments
involved. For example, in the case of a swap involving two bonds, the benefits in
question can be the periodic interest (coupon) payments associated with such
bonds. Specifically, two counterparties agree to exchange one stream of cash
flows against another stream. These streams are called the legs of the swap. The
swap agreement defines the dates when the cash flows are to be paid and the
way they are accrued and calculated.[1] Usually at the time when the contract is
initiated, at least one of these series of cash flows is determined by an uncertain
variable such as a floating interest rate, foreign exchange rate, equity price, or
commodity price.[1]
The cash flows are calculated over a notional principal amount. Contrary to
a future, a forward or an option, the notional amount is usually not exchanged
between counterparties. Consequently, swaps can be in cash or collateral.
Swaps can be used to hedge certain risks such as interest rate risk, or
to speculate on changes in the expected direction of underlying prices.
Swaps were first introduced to the public in 1981 when IBM and the World
Bank entered into a swap agreement.[2] Today, swaps are among the most
heavily traded financial contracts in the world: the total amount of interest rates
and currency swaps outstanding is more thn $348 trillion in 2010, according
to Bank for International Settlements (BIS).

14.What is a quotation?
A financial quotation refers to specific market data relating to
a security or commodity. While the term quote specifically refers to the bid
price or ask price of an instrument, it may be more generically used to relate to
the last price which the security traded at ("last sale"). This may refer to both
exchange-traded and over-the-counter financial instruments.

15.How many types of quotations do you know? Give the definitions.

The bid price (also known as the buy price) and the ask price (also known as
the sell price) of a security are the prices (and often quantities) at which buyers
and sellers are willing to purchase or sell that security. The bid shows the current
price at which a buyer is willing to purchase shares, while the ask shows the
current price at which they are willing to sell. The quantities at which these
trades are placed are referred to as "bid size" and "ask size." For instance, if a
trader submits a limit order to buy 1000 shares of MSFT at $28.00, this order will
appear in a market maker for MSFT's book with a bid of $28.00 and a bid size of
10.

16.Which two categories of rates of exchange do banks offer?

Direct and undirect rate of exachange.

17.What is the balance of payments of a country?

Balance of Payment (BoP) of a country is defined as, "Systematic record of all

economic transactions between the residents of a foreign country" Thus balance
of payments includes all visible and non-visible transactions of a country during a
given period, usually a year. It represents a summation of country's current
demand and supply of the claims on foreign currencies and of foreign claims on
its currency.

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18.List the four major sections of the balance of payments.

Trades in goods, services, investment income, transfers.

19.Define the residents.

Resident, a person who maintains residency (domicile) in a given place.

20.Define the non-residents.

An individual who mainly resides in one region or jurisdiction but has
interests in another region. In the region where he or she does not mainly
reside, he or she will be classified by government authorities as a non-resident.
The classification itself will be determined in each region based on set
circumstances such as the amount of time spent within the region during the
calendar year. This classification is focused on where the person resides and does
not focus on citizenship.

21.What are ferign exchange transactions?

Foreign exchange transaction is a type of currency transaction that involves two
countries. Generally, a foreign exchange transaction involves conversion of
currency of one country with that of another.

22.List the transaction included in the foreign exchange transactions.

The conversion of currency in a foreign exchange transaction can be performed
through :
1. buying or selling of goods and services on credit;
2. borrowing or lending funds

23.Identify the legal framework of the foreign exchange market in Romania.

Law nr. 297/2004 .

24.List the minimal conditions , which must be fulfilled for the perticipation of the
foreign exchange market as an authorized broker.
The Forex market is decentralized and operates with no central exchange
or clearing house. In order to regulate the market there are several
governmental and independent supervisory bodies around the world, such as
the National Futures Association, the Commodity Futures Trading Commission,
the Australian Securities and Investments Commission and the Financial
Conduct Authority. These bodies act as watchdogs for their respective markets
and provide financial licenses to organizations that are of good standing and
have enough funds to run a broker business.[1]
The objective of regulation is to ensure fair and ethical business behaviour.
In their turn all foreign exchange brokers, IBs and signal sellers have to
operate in strict compliance with the rules and standards laid down by the
Forex regulators, otherwise their activity is regarded as unlawful. First of all,
they must be registered and licensed in the country where their operations are
based, which ensures quality control standards are met. In accord with this
regulation licensed brokers are subject to recurrent audits, reviews and
evaluations which force them to maintain the industry standards. Foreign
exchange brokers must keep a sufficient amount of funds to be able to
execute and complete foreign exchange contracts concluded by their clients
and also to return clients funds intact in case of bankruptcy.

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Each Forex regulator operates within its own jurisdiction but often work
together in purse of fraudulent activities. In the European Union a license from
one member state covers the whole continent. Not all foreign exchange
brokers are regulated which means that traders are encouraged to invest only
with companies that have a valid financial license and do prior research before
opening a trading account.

25.Desscribe the inter-banking foreign exchange market in Romania.

The exchange rate on the monetary market is constituted in the price takers
manner, consequence of the transactions with relatively low amounts, and of
the impossibility of imposing upon a certain rate. But, for high levels of volume
there are situation in which the exchange rate is negotiated.
Consequently to the recent liberalization of the monetary market, Romania is
an atypical case in which the reference element daily expected and assumed
by the majority of the economic agents in the country- is the medium
exchange rate calculated and communicated by RBN. In these conditions, the
use of models like ARIFMA or the replication of the Tokyo experiment is, for
the moment, improper.

26.What is a spot rate?

The price quoted for immediate settlement on a commodity, a security or a
currency. The spot rate, also called spot price, is based on the value of an
asset at the moment of the quote. This value is in turn based on how much
buyers are willing to pay and how much sellers are willing to accept, which
depends on factors such as current market value and expected future market
value. As a result, spot rates change frequently and sometimes dramatically.

27.List the main factors that affect the movement of spot rates.
Current market value and expected future market value.

28.What is a forward rate?

A rate applicable to a financial transaction that will take place in the future.
Forward rates are based on the spot rate, adjusted for the cost of carry and refer
to the rate that will be used to deliver a currency, bond or commodity at some
future time. It may also refer to the rate fixed for a future financial obligation,
such as the interest rate on a loan payment.

29.What are the main exchange rate arranjements?

1 Float
1.2 Pegged float
1.3 Fixed
1.4 Currency board
1.5 Dollarization

30.Define a foreign exchange risk.

1. The risk of an investment's value changing due to changes in currency
exchange rates.
2. The risk that an investor will have to close out a long or short position in a
foreign currency at a loss due to an adverse movement in exchange rates. Also
known as "currency risk" or "exchange-rate risk".

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Financial futures contracts

A financial future contract is a contractual agreement, generally
made on the trading floor of a futures exchange, to buy or sell a particular
commodity or financial instrument at a pre-determined price in the future.
Futures contracts detail the quality and quantity of the underlying asset;
they are standardized to facilitate trading on a futures exchange. Some
futures contracts may call for physical delivery of the asset, while others
are settled in cash.
Some representative financial futures contracts are:
1. United States
90-day Eurodollar *(IMM)
1 mo LIBOR (IMM)
Fed Funds 30 day (CBOT)
2. Europe
3 mo Euribor (Euronext.liffe)
90-day Sterling LIBOR (Euronext.liffe)
Euro Sfr (Euronext.liffe)
3. Asia
3 mo Euroyen (TIF)
90-day Bank Bill (SFE)

In finance, a futures contract (more colloquially, futures) is a

standardized contract between two parties to buy or sell a specified asset
of standardized quantity and quality for a price agreed upon today
(the futures price) with delivery and payment occurring at a specified
future date, the delivery date. The contracts are negotiated at a futures
exchange, which acts as an intermediary between the two parties. The
party agreeing to buy the underlying asset in the future, the "buyer" of
the contract, is said to be "long", and the party agreeing to sell the asset
in the future, the "seller" of the contract, is said to be "short".
While the futures contract specifies a trade taking place in the
future, the purpose of the futures exchange institution is to act as
intermediary and minimize the risk of default by either party. Thus the
exchange requires both parties to put up an initial amount of cash
(performance bond), the margin. Additionally, since the futures price will
generally change daily, the difference in the prior agreed-upon price and
the daily futures price is settled daily also (variation margin). The
exchange will draw money out of one party's margin account and put it
into the other's so that each party has the appropriate daily loss or profit.
If the margin account goes below a certain value, then a margin call is
made and the account owner must replenish the margin account. This
process is known as marking to market. Thus on the delivery date, the
amount exchanged is not the specified price on the contract but the spot
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value (i.e. the original value agreed upon, since any gain or loss has
already been previously settled by marking to market).
A closely related contract is a forward contract. A forward is like a
futures in that it specifies the exchange of goods for a specified price at a
specified future date. However, a forward is not traded on an exchange
and thus does not have the interim partial payments due to marking to
market. Nor is the contract standardized, as on the exchange.
Unlike an option, both parties of a futures contract must fulfill the
contract on the delivery date. The seller delivers the underlying asset to
the buyer, or, if it is a cash-settled futures contract, then cash is
transferred from the futures trader who sustained a loss to the one who
made a profit. To exit the commitment prior to the settlement date, the
holder of a futures position can close out its contract obligations by taking
the opposite position on another futures contract on the same asset and
settlement date. The difference in futures prices is then a profit or loss.
Pricing
When the deliverable asset exists in plentiful supply, or may be
freely created, then the price of a futures contract is determined
via arbitrage arguments. This is typical for stock index futures, treasury
bond futures, and futures on physical commodities when they are in
supply (e.g. agricultural crops after the harvest). However, when the
deliverable commodity is not in plentiful supply or when it does not yet
exist - for example on crops before the harvest or on Eurodollar Futures
or Federal funds rate futures (in which the supposed underlying
instrument is to be created upon the delivery date) - the futures price
cannot be fixed by arbitrage. In this scenario there is only one force
setting the price, which is simple supply and demand for the asset in the
future, as expressed by supply and demand for the futures contract.
Arbitrage arguments ("Rational pricing") apply when the deliverable
asset exists in plentiful supply, or may be freely created. Here, the
forward price represents the expected future value of the
underlying discounted at the risk free rateas any deviation from the
theoretical price will afford investors a riskless profit opportunity and
should be arbitraged away. We define the forward price to be the strike K
such that the contract has 0 value at the present time. Assuming interest
rates are constant the forward price of the future is equal to the forward
price of the forward contract with the same strike and maturity. It is also
the same if the underlying asset is uncorrelated with interest rates.
Otherwise the difference between the forward price on the future (futures
price) and forward price on the asset, is proportional to the covariance
between the underlying asset price and interest rates. For example, a
future on a zero coupon bond will have a futures price lower than the
forward price. This is called the futures "convexity correction."
Thus, assuming constant rates, for a simple, non-dividend paying
asset, the value of the future/forward price, F(t,T), will be found by
compounding the present value S(t) at time tto maturity T by the rate of
risk-free return r.

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or, with continuous compounding

This relationship may be modified for storage costs, dividends, dividend

yields, and convenience yields.
In a perfect market the relationship between futures and spot prices
depends only on the above variables; in practice there are various market
imperfections (transaction costs, differential borrowing and lending rates,
restrictions on short selling) that prevent complete arbitrage. Thus, the
futures price in fact varies within arbitrage boundaries around the
theoretical price.
Futures traders
Futures traders are traditionally placed in one of two
groups: hedgers, who have an interest in the underlying asset (which
could include an intangible such as an index or interest rate) and are
seeking to hedge out the risk of price changes; and speculators, who seek
to make a profit by predicting market moves and opening
a derivative contract related to the asset "on paper", while they have no
practical use for or intent to actually take or make delivery of the
underlying asset. In other words, the investor is seeking exposure to the
asset in a long futures or the opposite effect via a short futures contract.
Hedgers
Hedgers typically include producers and consumers of a commodity
or the owner of an asset or assets subject to certain influences such as an
interest rate.
For example, in traditional commodity markets, farmers often sell
futures contracts for the crops and livestock they produce to guarantee a
certain price, making it easier for them to plan. Similarly, livestock
producers often purchase futures to cover their feed costs, so that they
can plan on a fixed cost for feed. In modern (financial) markets,
"producers" ofinterest rate swaps or equity derivative products will use
financial futures or equity index futures to reduce or remove the risk on
the swap.
Those that buy or sell commodity futures need to be careful. If a
company buys contracts hedging against price increases, but in fact the
market price of the commodity is substantially lower at time of delivery,
they could find themselves disastrously non-competitive (for example
see: VeraSun Energy).
Speculators
Speculators typically fall into three categories: position traders, day
traders, and swing traders (swing trading), though many hybrid types and
unique styles exist. With many investors pouring into the futures markets
in recent years controversy has risen about whether speculators are
responsible for increased volatility in commodities like oil, and experts are
divided on the matter.
An example that has both hedge and speculative notions involves
a mutual fund or separately managed account whose investment objective

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is to track the performance of a stock index such as the S&P 500 stock
index. The Portfolio manager often "equitizes" cash inflows in an easy and
cost effective manner by investing in (opening long) S&P 500 stock index
futures. This gains the portfolio exposure to the index which is consistent
with the fund or account investment objective without having to buy an
appropriate proportion of each of the individual 500 stocks just yet. This
also preserves balanced diversification, maintains a higher degree of the
percent of assets invested in the market and helps reducetracking error in
the performance of the fund/account. When it is economically feasible (an
efficient amount of shares of every individual position within the fund or
account can be purchased), the portfolio manager can close the contract
and make purchases of each individual stock.
The social utility of futures markets is considered to be mainly in the
transfer of risk, and increased liquidity between traders with different risk
and time preferences, from a hedger to a speculator, for example
Options on futures
In many cases, options are traded on futures, sometimes called
simply "futures options". A put is the option to sell a futures contract, and
a call is the option to buy a futures contract. For both, the option strike
price is the specified futures price at which the future is traded if the
option is exercised. Futures are often used since they are delta
oneinstruments. Calls and options on futures may be priced similarly to
those on traded assets by using an extension of the Black-Scholes
formula, namely the BlackScholes model for futures.
Investors can either take on the role of option seller/option writer or
the option buyer. Option sellers are generally seen as taking on more risk
because they are contractually obligated to take the opposite futures
position if the options buyer exercises their right to the futures position
specified in the option. The price of an option is determined by supply and
demand principles and consists of the option premium, or the price paid to
the option seller for offering the option and taking on risk.

Thank you!
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 University Lucian Blaga, Sibiu

Student:
Boboc Raluca Andreea
Finance-banks
Year 1
Group 1
2012-2013

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