Reading #58 - Fwd Mkts and Contracts Flashcards
define “long forward position”
“party to the fwd contract that agrees to BUY the financial/physical asset”
define short forward position
“party to the fwd contract that agrees to sell or deliver the asset”
which party, short or long, is exposed to default risk?
both long and short
define deliverable forward contact
delivering the physical asset in the contract
how to terminate position prior to expiration?
enter into an opposite fwd contract with expiration date equal to timing remaining on original contract (same party or diff party)
who is the “end user of a fwd contract”
typically corporation,gov’t unit, or nonprofit institution
who are the dealers
often the banks but can be a nonbank financial institution
are dividends included in equity forward contracts?
not usually
define Eurodollar deposit
term for deposits in large banks outside US denominated in US dollras
Define LIBOR and EURIBOR
Libor is lending rate on dollar denominated loans btwn banks and Euriobor is for euro denominated
define FRA
viewed as forward contract to borrow/lend money at certain rate at some future date
define long position in FRA
party that borrows the money
in FRA, does long pay or receive $ if rate at expiration is above contract rate?
long will receive payment because viewed as right to borrow below market rates
in FRA, does long pay or receive $ if rate at expiration is below contract rate?
long pays because viewed as right to lend at higher than market rates
how to quote FRA as 60-day FRA on 90-day LIBOR?
2 by 5 FRA (2 month from now, settlement date based on 90 day libor, 60 days = 3+2
