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Introduction to Financial Derivatives. Lecture #1 Jinho Bae March 6, 2008. Ch.1 Introduction to futures. Types of transactions Spot Forward Futures. Types of transactions. 1. Spot transaction - PowerPoint PPT Presentation
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Introduction to Financial Derivatives
Lecture #1
Jinho Bae
March 6, 2008
Ch.1 Introduction to futures
Types of transactions
• Spot
• Forward
• Futures
Types of transactions
1. Spot transaction
A transaction where the seller delivers a good to the buyer and the buyer pays the price immediately.
e.g) Purchase of a fridge at Himart
1M won
Question) If credit card rather than cash is used to pay, will it be a spot transaction?
Couple Hi-Mart
Hyundai card
Fridge (now)
1M won (now) 1M won(1 month later)
Answer)
2. Forward
An agreement to sell or buy an asset (good) at a certain time in the future for a certain price
At the time of agreement, both parties determine the time and the price.
No delivery or payment is made at the time of agreement.
Delivery and payment are made at the agreed-upon future date.
Also called forward contract.
e.g.) An agreement to buy 100 heads of white cabbage in December for 1,000 won per head
0.1M won
Today
December
Contract
Some characteristics of a forward contract
Buyer and seller must seek each other (sometimes time-consuming)
Various terms and conditions can be put in the contract
- Quantity
- Price
- Delivery date
No guarantee of fulfillment of the contract
3. Futures An agreement to sell or buy an asset at a
certain time in the future for a certain price
Some characteristics of futures contract
The exchange is the other side of futures contract
• Case of buying
exchange buyer
• Case of selling
exchange seller
Fulfillment of the contract is guaranteed
Fulfillment of the contract is guaranteed
Cf) Two parties of forward transaction
buyer seller
Standardized terms and conditions
• E.g.: Gold futures– Only Gold bar (99.99% pure) is traded– Contract size: 1Kg– Tick Size & Value : 10 won/g, representing a
value of KRW 10,000
Main differences between futures and forward
Futures Forward
Traded on an exchange
Private contract between two parties
Standardized Not standardized
No credit risk Some credit risk
Animation about futures
• Korea Exchange: http://fm.krx.co.kr
KRX info center/Cartoon Plaza
KRX info center/Flash Plaza
Gold bar