Forward Futures Options Essay

Words: 1495
Pages: 6

Forward, Futures, & Options
Heather L. Dirgo
BUS450: International Finance
Instructor Kristian Morales
September 29, 2014

Forward, Futures, & Options Fundamentally, forward and futures abridge have the same function: each symbol of contracts allow people to buy or sell a particular type of asset at a particular time at a given price. However, it is in the specific details that these contracts differ. First, futures contracts are exchange-traded and, therefore, are regularize contracts. Forward reduce, on the other part, are private agreements between two partly and are not as unmitigated in their stated expression and qualification. Because forward incur are private agreements, there is always a chance that a party
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Arbitrage profit can be earned by selling at forward rate and buying at future spot rate. The main assumption of arbitrage is that investor can borrow and lend at the same interest rate (Damodaran, n.d.). Whenever it is determined that the future contract price is overpriced, then the seller of the future contract will short sell on the underlying asset. Mispricing the currency future will pave way for the arbitrage opportunity. Differences in the option pricing pave way for arbitrage opportunity in the foreign currency market. The main reason for such difference in the price is the volatility. Volatility is the standard deviation, which widely differs about 2%, whenever the price is being quoted in different market (Nobile, n.d.). Identifying this difference will provide for an arbitrage opportunity to the trader. In simple terms put call parity formula can be used in order to determine whether the call option and put option are being priced appropriately. When there is a difference in option, this is the time where the arbitrager takes up the opportunity to make the profit (Sercu, n.d., p. 67). International money markets are markets for cross-border exchange of financial instruments with maturities of less than one-year. Bonds are long-term promissory notes. Equities are