The chief financial officer of the corporation you work for recently told you that he had a strong preference to use forward contracts rather than futures contracts to hedge: “You can get contracts tailor-made to suit your needs.”
a. Comment on the CFO’s statement.
b. What other factors influence the decision to use futures or forward contracts?
Question 14.13: The chief financial officer of the corporation you work for ...
a. Forward contracts do have the advantage that they can be customized, but unlike futures contracts, there is counterparty risk—the risk that the other party to the transaction does not carry out their obligations under the contract.
b. A factor to consider is that by tailoring it to the corporation’s needs, there must be another party willing to take the other side of the transaction, as tailored as it is.
Related Answered Questions
a. Interest rate swap
b. Orono pays 7% × $75 milli...
a. intrinsic value = $42 − 40 = $2; time value = $...
The payoff (that is, profit) for a call option is ...
a. A call option: an option to buy the underlying ...
Disagree. In the case of an option, the buyer of t...
An American option may be exercised at any time pr...
A put option is an option to sell the underlying. ...
In the case of derivatives, there is some underlyi...