FİNANSAL PİYASALAR VE KURUMLAR

The payoff from a forward contract at expiration date is calculated as follows:

Payoff to long forward = Spot price at expiration − forward price

Payoff to short forward = Forward price − spot price at expiration

Exchange-traded derivatives are standardized such that its terms and conditions are precisely specified by the exchange where OTC is the customizable contract that can be customized by the involving parties.

Futures contracts are the same as forward contracts except that futures contracts are organized, regulated and managed by an exchange. In other words, futures contracts are standardized. A futures contract as defined by Chisholm (2011) is: “an agreement made through an organized exchange to buy or to sell a fixed amount of an underlying commodity or financial asset on a future date (or within a range of dates) at an agreed price”.

In brief, forward commitments have the following characteristics: • They are customized contracts so to suit both involving parties’ needs i.e. grade, time, and place of delivery. • There is no specific location or address to trade forward contracts. • Any type of commodities can be traded via forward contracts.Forward Contracts It is an OTC contract in which a buyer and a seller commits each other to do a transaction on a specific underlying asset at a future date at a previously determined fixed price.

Unlike forward contracts, futures contracts require the existence of a legally recognized futures exchange that provides, manages and organizes these contracts. On the exchange, not all types of derivatives are allowed, only certain contracts are authorized for trading. Futures contracts can be accessed through both physical locations as well as through an electronic system. The derivative exchange has a mechanism that offers the two parties a guarantee against any default. An organized Exchange has a Clearing house through which it settles daily the losses and gains of futures contracts and protects itself against loss.

Plain vanilla swaps are the most famous swap contracts that pursue the conventions of the International Swaps and Derivatives Association Butler. Plain vanilla swap for fixed-for-floating interest rate swap is the most popular type of swap that was introduced to the market in the 1980s.

In comparison to futures contracts, swaps contracts are more prone to default risk in the following aspects: First, a performance bond is not required in swaps contracts, whereas a margin is required in futures contracts, and this tends to give swaps slightly more default risk than futures contracts. Second, the counterparty in swaps contracts are generally a commercial or investment bank, whereas in futures contracts the clearinghouse is considered the counterparty and commercial or investment bank are more prone to default than a clearinghouse. Third, futures contracts are daily marked-to-market and the entire gain or loss is settled from day to day, whereas the settlement in swaps contracts are longer payments is longer i.e. six months. The riskiness of a swaps contracts falls somewhere between the riskiness of futures contracts and the forward contracts.

MMY = BEY*(360/365)

MMY= 0.056*(360/365)=0.05523 = %5.52

A call option is in the money, if the market price is above the strike price. A call option is out of the money, if the market price is below the strike price. A call or put option is at the money, if the market price is equal to the strike price. A put option is in the money, if the market price is below the strike price. A put option is out of the money, if the market price is above the strike price.

3/12=0.25

75*(1.12^0.25)=77.155

The main variables used in the Black-Scholes model include:

• Price of underlying asset, which is a current market price of the asset

• Strike price, which is a price at which an option can be exercised

• Volatility, which is a measure of how much the security prices will move in the subsequent periods. Volatility is the trickiest input in the option-pricing model as the historical volatility is not the most reliable input for this model

• Time until expiration, which is a time between calculation and option’s exercise date

• Interest rate, which is the risk-free interest rate.

Derivatives are traded in future, not spot, markets.

It is the OTC markets where contracts sold are customizable not standardized.

In brief, forward commitments have the following characteristics:

They are customized contracts so to suit both involving parties’ needs i.e. grade, time, and place of delivery.

There is no specific location or address to trade forward contracts.

Any type of commodities can be traded via forward contracts.

The party holding short position loses money, since it is obligated to sell an assets under its market value.

Counterparty risk raises when one of the agreement parties refuses to carry out his/her obligation to deliver the underlying asset on the expiration date at the location specified in the forward contract.

Futures contracts can be accessed through both physical locations as well as through an electronic system.

Options are contingent claim contracts that provide the right but not the obligation to buy an asset at a specific price at a later date in the future.

Underlying assets price calculation includes all of three factors given in the question.