GrowthofDerivativesMarkets(Figure 5.1)SizeofMarket700($ trillion)600OTCExchange5004003002001000Jun-98Jun-99Jun-00Jun-01Jun-02Jun-03Jun-04Jun-05Jun-06Jun-07Jun-08Jun-09Jun-106RiskManagementandFinancialInstitutions,3e,Chapter5,CopyrightJohnC.Hull2012
Growth of Derivatives Markets (Figure 5.1) Risk Management and Financial Institutions, 3e, Chapter 5, Copyright © John C. Hull 2012 6
Forward Contracts A forward contract is an agreement to buyor sell an asset at a certain price at acertain future time Forward contracts trade in the over-the-counter marketThey are particularly popular on currenciesand interest ratesRiskManagementandFinancialInstitutions,3e,Chapter5,CopyrightJohnC.Hull20127
Forward Contracts ⚫ A forward contract is an agreement to buy or sell an asset at a certain price at a certain future time ⚫ Forward contracts trade in the over-thecounter market ⚫ They are particularly popular on currencies and interest rates Risk Management and Financial Institutions, 3e, Chapter 5, Copyright © John C. Hull 2012 7
ForeignExchangeQuotesforGBPAugust 24,2011 (Seepage93)BidOffer1.63981.6402Spot1.63921.63971-monthforward1.63821.63873-month forward1.63281.63341-yearforward8RiskManagementandFinancialInstitutions,3e,Chapter5,CopyrightJohnC.Hull2012
Foreign Exchange Quotes for GBP August 24, 2011 (See page 93) Risk Management and Financial Institutions, 3e, Chapter 5, Copyright © John C. Hull 2012 8 Bid Offer Spot 1.6398 1.6402 1-month forward 1.6392 1.6397 3-month forward 1.6382 1.6387 1-year forward 1.6328 1.6334
Profit from a Long Forward PositionProfitPrice of UnderlyingKat MaturityRiskManagementandFinancialInstitutions,3e,Chapter5,CopyrightJohnC.Hull20129
Profit from a Long Forward Position Risk Management and Financial Institutions, 3e, Chapter 5, Copyright © John C. Hull 2012 9 Profit Price of Underlying K at Maturity
Profit from a Short Forward PositionProfitPrice of Underlyingat MaturityK10RiskManagementandFinancialInstitutions,3e,Chapter5,CopyrightJohnC.Hull2012
Profit from a Short Forward Position Risk Management and Financial Institutions, 3e, Chapter 5, Copyright © John C. Hull 2012 10 Profit Price of Underlying K at Maturity