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    Derivatives: Rate & Interest Rate. There Are Foreign Exchange Derivatives &

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    faisal
    Derivatives are financial instruments used to reduce risk from fluctuations in foreign exchange rates and interest rates. There are two main types - foreign exchange derivatives and interest rate derivatives. Foreign exchange derivatives include currency futures, forwards, and options. Currency futures are standardized exchange-traded contracts, while forwards are customized over-the-counter contracts. Currency options provide protection from adverse exchange rate movements while allowing the investor to benefit from favorable movements. Interest rate derivatives aim to reduce interest rate risk and include interest rate futures, options, swaps, caps, collars, and floors.

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    Derivatives: Rate & Interest Rate. There Are Foreign Exchange Derivatives &

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    faisal
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    Derivatives are financial instruments used to reduce risk from fluctuations in foreign exchange rates and interest rates. There are two main types - foreign exchange derivatives and interest rate derivatives. Foreign exchange derivatives include currency futures, forwards, and options. Currency futures are standardized exchange-traded contracts, while forwards are customized over-the-counter contracts. Currency options provide protection from adverse exchange rate movements while allowing the investor to benefit from favorable movements. Interest rate derivatives aim to reduce interest rate risk and include interest rate futures, options, swaps, caps, collars, and floors.

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    Derivates

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    Derivatives are financial instruments used to reduce risk from fluctuations in foreign exchange rates and interest rates. There are two main types - foreign exchange derivatives and interest rate derivatives. Foreign exchange derivatives include currency futures, forwards, and options. Currency futures are standardized exchange-traded contracts, while forwards are customized over-the-counter contracts. Currency options provide protection from adverse exchange rate movements while allowing the investor to benefit from favorable movements. Interest rate derivatives aim to reduce interest rate risk and include interest rate futures, options, swaps, caps, collars, and floors.

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    42 views3 pages

    Derivatives: Rate & Interest Rate. There Are Foreign Exchange Derivatives &

    Uploaded by

    faisal
    Derivatives are financial instruments used to reduce risk from fluctuations in foreign exchange rates and interest rates. There are two main types - foreign exchange derivatives and interest rate derivatives. Foreign exchange derivatives include currency futures, forwards, and options. Currency futures are standardized exchange-traded contracts, while forwards are customized over-the-counter contracts. Currency options provide protection from adverse exchange rate movements while allowing the investor to benefit from favorable movements. Interest rate derivatives aim to reduce interest rate risk and include interest rate futures, options, swaps, caps, collars, and floors.

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    Derivatives

    * Derivatives are used to reduce the risk of both foreign exchange


    rate & interest rate. There are Foreign exchange derivatives &
    Interest rate derivatives.

    * Foreign exchange derivatives:

    I. Currency futures:
    It is a standardized contract for the sale or
    purchase at a set future date of set quantity of
    currency.
    Currency Futures
    Forward contract
    * It is a standardized
    * It is a bespoke
    contract.
    contract.
    * It is traded on the open * It is traded on OVER-
    market.
    THE-COUNTER (OTC)
    * It is contracted in US $ * It is contracted in any
    currency.
    * Flexible close-out dates * Fixed close-out dates
    (contract settlement).
    (contract settlement).
    * It is cheaper.
    * It is expensive.

    Futures Adv
    Futures Disadv
    * Transaction costs
    * The contract cannot be
    should be lower than
    tailored to the users
    other hedging methods. requirements.
    * It is traded on the
    * There is a risk that
    open market.
    futures contract price
    may move by a different
    amount from the price of
    the contract.
    * The exact date of
    * Only a limited number
    receipt or payment is
    of currencies are the
    not known.
    subject of future
    contracts.

    * It doesnt allow to take
    advantage of favourable
    currency movements.

    II.

    III.


    Currency options:
    It gives protection against adverse exchange rate
    risk movements while allowing the investor to take
    advantage of favourable exchange rate movements.
    It is particularly used in the case of uncertain
    cashflow.

    Disadvantages of Currency options:

    (i) They have a cost (Option Premium).
    (ii) Options must be paid as soon as they are
    bought.
    (iii) Traded options are not available in every
    currency.
    (iv) Tailor-made options lack negotiability.


    Currency swaps:
    It involves exchange of debts of one currency to
    another currency.

    Example:
    Spot rate: GBP 1- $1.60
    X, a parent company needs $1.6m to purchase
    another subsidiary company & Y, a subsidiary
    company needs GBP 1m to purchase a machinery
    from UK. So X company can borrow GBP 1m & Y
    company can borrow $1.6m.

    Advantages of Currency swaps:
    (i) It is easy to arrange & are flexible.
    (ii) Transaction costs are low.
    (iii) It is used to reduce Forex risk.
    (iv) The company can gain access to debt finance in
    another country.
    (v) It is used to restructure the currency base.



    * Interest rate derivatives:
    I. Interest rate futures:
    It is quite similar to FRA.

    II. Interest rate options (right):
    It gives protection against adverse interest rate
    risk movements while allowing the investor to take
    advantage of favourable interest rate movements.

    III. Interest rate swaps:
    It is an agreement where two parties agree to
    exchange interest payments.

    IV. Interest rate caps, collars & floor:
    Caps= Maximum limit of interest rate
    Floor= Minimum limit of interest rate
    Collars= Purchase of Caps & sale of floor.













    Prepared by


    Khandaker Naimul Alam
    ACCA Lecturer

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