1.Currency derivatives can be classified into instruments with Essay

1.Currency derivatives can be classified into instruments with symmetrical(fixed)and asymmetrical(open) outcomes.Define their respective characteristics, and use examples to illustrate your answer - Essay Example futures are symmetrical: if one can enter into a forward at a particular price, the price might either go up or come down, and so, one can make either profit or a loss. Forwards are quite common in commodities, and can be used either for speculation or for hedging. Eg: If a person has an order to ship 10000 tons of steel for a period of 6 months at a prefixed price of $1000 per ton. And the person is expecting the price of steel to increase. So, to hedge against the price risk, the person enters into a forward purchase agreement, for 10000 tons 6 months hence. The person position is now fully hedged: if the price of steel increases as expected, person will either claim a delivery from the forward seller, or a net settlement. If the price comes down, person will be obliged to settle by making a payment for the price difference to the forward seller, but will be fully compensated by the pre-fixed price it gets from its own forward sale contract. 2. Options have an asymmetric return profile: an option is an option with one party. The option will be exercised only when the purchaser of the option is in-the-money. Therefore, the only loss in an option is the cost of writing and carrying the option. Hence, options have an asymmetric return profile. On the other hand, the option-seller only makes returns by way of fees or premium for selling the option, against which the person takes the risk of being out-of-money. If the option is not exercised, person makes fees, but if the option is exercised, considerably, the person may lose. For example, if one person is holding a security of $1000 buys an option to put the security at its current price with some other person. Now if the price of the security goes down to $900. The person may exercise to sell the option of the security to some other person at the agreed price of $1000 to protect against the loss of account of turn down in the market value. If, on the other hand, the price of the security is increased to $1100,