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Futures
- Futures contract is an agreement between two parties to buy or sell a standard quantity of a specific instrument at a predetermined future date and at a predetermined price. Future contracts are traded on various exchanges such as Chicago Board of Trade, Chicago Mercantile exchange, 'London International Financial futures exchange etc.
- A clearing house is an institution that clears are the transactions done by a futures exchange.
- There are different types of futures contracts like interest rate futures, foreign exchange futures, commodity futures etc.
- Interest rate swap is an agreement between two parties wherein one stream of future interest payments is exchanged for another, based on a particular principal amount.
- An interest rate cap is an interest rate option offered by Financial institutions in the OTC market.
- Futures contracts can be valued using cost-of-carry model.
- The relationship between the cash price of a product and future price of that product is called basis.
- The difference between two-futures prices is called spread.
- Generally, future prices are considered as biased predictors of future spot prices as risk premium can be transferred from holders of the asset to buyers of futures.
- Hedging is a mechanism used by participants in futures markets to cover their price risk.
- Asset allocation strategies are used in taking decisions related to switching of amounts invested in different sectors.
- Futures contracts can also be hedged through portfolio insurance.