7/23/2019 2015F Investments 02 Forwards, Futures, And Swaps (1) http://slidepdf.com/reader/full/2015f-investments-02-forwards-futures-and-swaps-1 1/45 Investments Week 2: Forwards, Futures, and Swaps Fall 2015 Professor Albert Wang 王文奇
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InvestmentsWeek 2: Forwards,
Futures, and Swaps
Fall 2015
Professor Albert Wang王文奇
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Page 2
2 Sep 2015 Agenda
►Adm!n!strat!ve "W1 due ne#t week !n $lass
►%e$ture &urrent 'vents (pdate &"22)2*►Pa+o-Pro.t /!agrams►Forwards-Futures►Forwards-Futures e#amples►Swaps
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Page *
&urrent 'vents
► AI' Inde#: *0340
►SP500 Inde#: 1,677463
►
8e$ent .nan$!al news (S Federal 8eserve 9 no Sept4 $ange !n
pol!$+
;olkswagen 9 $eated on (S em!ss!ons
tests, .nes $ould be uge4 <ter$ountr!es ma+ follow up4
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Page
Pa+o and Pro.t /!agrams
►%!near Pa+osPayof (time T)
Price o underlying
Payof (time T)
Price o underlying
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Forwards and FuturesIntrodu$t!on
►=ot are $ontra$ts to bu+ - sell anunderl+!ng asset at a spe$!.ed pr!$eand at a spe$!.ed t!me =ot $an oer .nan$!al e#posure to te
same underl+!ng asset
=ot >and all der!vat!ves? are @ero)net)
suppl+►/!eren$es between Forwards and
Futures are !n $ontra$t deta!ls and
log!st!$s of trad!ng
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Forwards and FuturesAlternat!ves
►Alternat!ve to =u+!ng (nder+!ng &ompl!$at!ons►Ind!$es 9 $ostl+ to adm!n!ster bu+!ng-old!ng ea$
$omponent
►&ommod!t!es 9 storage >were would +ou store porkbell!es and for ow long?
►W+ trade forwards and futures %ower transa$t!on $ost
"!gl+ leveraged pos!t!ons
'as+ to B$loseC pos!t!ons b+ open!ng anoter andBnett!ngC
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Forwards
►Forwards &ontra$t set toda+ for del!ver+ of a good
at a set date !n te future at a set pr!$e4
Forwards are pr!$ed to ave @ero valuetoda+►Do mone+ $anges ands unt!l matur!t+ wen
del!ver+ !s taken
Str!$tl+ between two pr!vate part!es►'!ter s!de ma+ default4 =ot s!des ave r!sk4
►&ontra$ted between two ent!t!es so ver+
Ee#!ble and spe$!.able
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Futures
►Futures Ident!$al !n sp!r!t to forwards
BStandard!@ed, 8egulatedC forwards
&lear!ngouse serves as m!ddle)man►uarantees Bdel!ver+C of $as and underl+!ng to bot
s!des of transa$t!on
►8egulates and evaluates .nan$!al ealt of members
►Prov!des standard!@at!on and a market
►"olds d!vers!.ed portfol!o of default r!sk Garg!n a$$ount to !nsure aga!nst default
► +p!$all+ $as settlement
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►<pen!ng pos!t!ons &onta$t broker to trade futures &onta$t $ounterpart+ d!re$tl+ >or troug broker?
to trade forwards
►&los!ng pos!t!ons rade !n !dent!$al forward-future !n oppos!te
d!re$t!on w!t ADH $ounterpart+ >not ne$essar!l+or!g!nal?►Gost often pos!t!ons are $losed !n t!s manner►Forward $ounterpart+ rarel+ wants to reverse te trade►Futures $ounterpart+ does not need to be known
ake-make del!ver+ of underl+!ng for $as
=roker or e#$ange arranges nett!ng !f needed
rad!ng Ge$an!$s
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►Summar+ of ke+ $ara$ter!st!$s futures Standard!@ed $ontra$t un!ts &lear!ngouse warrants performan$e Se$ondar+ trad!ng 9 !ger l!u!d!t+ Garked to market da!l+ >or more often? Garg!n reu!rement
►Forwards or Futures Futures pr!$!ng as !nterest rate $ons!derat!ons due to
marg!n a$$ount balan$e Eu$tuat!ons►Pos!t!on marked to market da!l+ and enoug $as must be !n
marg!n a$$ounts►Garg!n balan$e earns !nterest e$n!$all+ w!ll be us!ng forwards pr!$!ng to s!mpl!f+
$al$ulat!ons, toug !n pra$t!$e futures are mu$ more$ommonl+ traded
8emember, bot ave te same fundamental .nan$!al
e#posure
Don)te$n!$al Summar+
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Forwards and Futures 8!sks
►Pr!$e 8!sk <nl+ !f used as a spe$ulat!ve !nstrument
8!sk)redu$!ng !f used as a "'/'►
IGG(DIJ'S aga!nst pr!$e r!sk►=as!s 8!sk
Future and Spot >underl+!ng? values d!verge►/epends on !nterest rate so as te same r!sk
$omponents4►/efault 8!sk
From $ounterpart+ !f us!ng forwards
Garg!n $all r!sk !f us!ng futures
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►Agr!$ultural $ommod!t!es►Getals and m!nerals >!n$lud!ng energ+ $ontra$ts?►Fore!gn $urren$!es►F!nan$!al se$ur!t!es futures
Interest rate >and bond? futures Sto$k !nde# futures Ind!v!dual sto$k futures
►ADH"IDK
Futures are e#$ange)traded and standard!@ed, so wat+ou see !s wat +ou get Forwards for ADH"ID $an be negot!ated b+ an+ !)bank,
t+p!$all+ at ver+ low $ost
Poss!ble (nderl+!ngInstruments
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Page 1*
Forwards and Futures'#ample 1
► Hou s!gn a forward $ontra$t to bu+ 100oun$es of gold on Gar$ 2, 2017 atL11*0 L11*0 !s te $ontra$ted forward pr!$e
It does not matter ow mu$ gold !s wortnow, a mont later, or on 10-2-04 be !t
L100, L11*0, or L20004 Hou st!ll ave tobu+ te gold at L11*0 per oun$e or elsedefault on +our $ontra$t >legal fees, et$4?
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Forwards and Futures'#ample 2
► Hou Must a$$ept +our bo+fr!end-g!rlfr!endNsmarr!age proposal and de$!de to marr+!m-er !n a +ear4
If +ou take +our engagement $omm!tmentser!ousl+, +ou ave to marr+ +our .an$O after a+ear, weter !n te follow!ng +ear +ou .nd oute-se trul+ !s Pr!n$e>ss? &arm!ng or te w!$ked>e)?w!t$4
A ser!ous engagement $omm!tment works l!ke aforward $ontra$t on$e agreed upon te dateand terms are set, regardless of te out$ome
>%u$k!l+? (nl!ke most .nan$!al $ontra$ts, !t !s notlegall+ b!nd!ngK
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► ere are two wa+s to a$u!re anunderl+!ng asset for some future date 1: Pur$ase !t now and store !t
2: ake a long pos!t!on !n futures► ese two strateg!es must ave te
same $osts to avo!d Barb!trageC
If te $osts are d!erent, ten someonewould BarbC te d!eren$e bu+ te$eap one, sell te e#pens!ve onemak!ng a pro.t but old!ng no r!sk andpa+!ng no $osts
Forward-Futures Pr!$!ng
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Spot)Futures Par!t+ eorem
►W!t a perfe$t edge te futures pa+o !s$erta!n 9 tere !s no r!sk
►A perfe$tl+ edged pos!t!on sould return
te r!sk)free rate of return %ong te underl+!ng >not!onal value L? and
sort te futures >$ostless to enter? or v!$e versa►<verall return sould be !dent!$al to old!ng L !n te
r!sk)free asset, s!n$e underl+!ng w!ll be del!vered to tefutures bu+er
► !s relat!ons!p $an be used to develop ano)arb!trage futures pr!$!ng relat!ons!p
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2 Wa+s to et (nderl+!ng'#posure
►=u+ futures !me 0►Do $ost
!me >0,t?►Do $ost
!me t►Pa+ F, re$e!ve
underl+!ng
►=u+ underl+!ng !me 0►Pa+ S
!me >0,t?►Pa+ old!ng $osts,
re$e!ve d!v!dends
!me t►Do $ostQ alread+ave underl+!ng
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Spot)Futures Par!t+
►'ssent!all+ euates te $as outEow at tematur!t+ date from te 2 wa+s to getunderl+!ng e#posure A? long futures: pa+ F =? bu+ underl+!ng: pa+ F;>S? 9 F;>/!v? R
F;>$osts?
t cd r
t
f
t
f
ccr ccr ccr f Se
cd r S
C Dr S F
)( ,
)1(
)1(
+−
=
+−+=
+−+=
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Spot)Futures Par!t+: Dotat!on
►Forward pr!$e, F: pr!$e set toda+ to transa$tat matur!t+►Gatur!t+, t: t!me at w!$ $ontra$t e#p!res►Spot pr!$e, S: $urrent pr!$e of te underl+!ng►F;>/!v!dends?, /
/!v!dend +!eld, d►F;>&osts?, &
&ost rate, $
►Det $onven!en$e +!eld, n$+: d)$ BDet $onven!en$e dollar pro.tC /)&
►8!skfree rate, r
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Arb!trage Poss!b!l!t!es
►If spot)futures par!t+ !s not observed,ten arb!trage !s poss!ble►If te futures pr!$e !s too !g, sort
te futures and a$u!re te sto$k b+borrow!ng te mone+ at te r!skfreerate►
If te futures pr!$e !s too low, go longfutures, sort te sto$k and !nvest tepro$eeds at te r!skfree rate
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&ow Forward Dumer!$al'#ample
►'#ample: Hou plan to open a lo$al restaurant $all Toann omas Steakouse !n 1 +ear4 If +oua$$uratel+ est!mate te number of $ow forwardsneeded on a regular bas!s, ten +ou $an keep tepr!$es of +our steaks almost $onstant, even !f tepr!$e of $ows !n$reases or de$reases4 Unow!ng +ouw!ll ave to del!ver a $owNs wort of steak !n te.rst week of bus!ness, +ou de$!de to bu+ a kobebeef $ow forward from an !nvestment bank4 epr!$e of tat ual!t+ $ow !s L1000 !n te open
market, te $ont!nuousl+ $ompounded r!sk)free rate!s 5V per +ear, te P; of te m!lk te $ow wouldprodu$e over te +ear !s L*0, and te P; of te a+and water to feed te $ow !s L104 ere are nooter bene.ts or $osts to own!ng su$ a $ow4
►Wat !s te Forward pr!$e
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$ont!nued
►S L1000, r$$r5V
►P;>/!v!dends? L*0 >m!lk?
►P;>&ost? L10 >a+, water?
25.1030]1030[1000
)(05.05.
=
−−=
−=
ee
CF FV Se F rt
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$ont!nued
►'#ample $ont!nued: Instantl+ after go!ng long a s!ngle $ow
forward, te pr!$e of $ows !n$reases to
L11004 Wat !s te ;A%(' of te long pos!t!on
Wat !s te !mpl!ed B$ow e#posureC !n
number of $ows
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Page 2
►J'8< !n!t!al $ost to enter a standard forward>marg!n balan$e reu!red for futures? "!g leverage makes for $onven!ent tool to
adMust e#posure to underl+!ng !nstruments
►Spe$ulat!on-%everag!ng 9 !n$rease e#posure long ) bel!eve pr!$e w!ll r!se sort ) bel!eve pr!$e w!ll fall
►
"edg!ng 9 de$rease e#posure long edge ) prote$t!ng aga!nst a r!se !n pr!$e sort edge ) prote$t!ng aga!nst a fall !n pr!$e
Futures rad!ng Strateg!es
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Page 25
Pro.t /!agram: Futures =u+er
Profit
Price
0
Futures
Buyer
Fo
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Pro.t /!agram: Futures Seller
0
Profits
Price
Futures Seller
Fo
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Page 23
Futures Pa+o-Pro.t /!agram ougt uest!ons
►Wat !s te d!eren$e between apa+o and pro.t d!agram for a forward$ontra$t Done 9 !n!t!al $ost to enter !s 0
►Wat !s te pa+o d!agram to a olderof an+ underl+!ng wo edges w!t te
appropr!ate not!onal value of futures 8!skfree along #)a#!s >!4e4 pr!$e r!sk of
underl+!ng?
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"edge '#ample
►Investor owns an !nde# fund tat as a$urrent value of L600►Assume d!v!dends of L20 w!ll be pa!d on te
fund at te end of te +ear►Assume futures $ontra$t tat $alls fordel!ver+ of one !nde# un!t !n one +ear !sava!lable for L625
►Assume te !nvestor edges b+ sell!ng orsort!ng one $ontra$t
►Wat !s te r!skfree rate
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"edge '#ample Potent!al<ut$omes
Value of ST 885 925 965
Payoff on Short (925 - ST) 40 0 -40
i!i"en" #nco$e 20 20 20
Total 945 945 945
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Page *0
8ate of 8eturn for te "edgedPos!t!on
%5
900
900)20925(
)(
0
00
=−+
=
−+
S
S D F
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Page *1
ools to AdMust '#posure
►(nderl+!ng <ften d!X$ult or e#pens!ve to obta!n %!ttle leverage allowed
►Forwards-Futures 'as+ and $eap to obta!n >I)=ank for $ustom!@ed
solut!ons, e#$anges for man+? '#treme leverage allowed
►Wen poss!ble, use forwards-futures to
adMust amount of e#posure to underl+!ng %!near $anges !n pa+o d!agram poss!ble '#amples of l!near $anges poss!ble
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"edge: %o$k In Pro.ts
►I own a w!dget ma$!ne tat produ$esw!dgets at a marg!nal $ost of L* ea$4 G+w!dget ma$!ne w!ll output 1 m!ll!on w!dgets
all at te same t!me, !n * monts4 e$urrent spot pr!$e of w!dgets !s L5, but tere!s no guarantee tat te pr!$e of w!dgets w!llnot Eu$tuate4 ere are no $osts or
d!v!dends to old!ng w!dgets, and ter!skfree rate !s V per +ear4 Wat !s tepresent value of te pro.t $an I lo$k !n !ftere e#!sts a fa!rl+ pr!$ed * mont futures
$ontra$t for w!dgets
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Page **
"edge: %o$k In Pro.ts$ont!nued
►If I edge w!t futures, I $an lo$k !n apr!$e of L5407 per w!dget4 /!s$ounted
at te r!skfree rate, tat nets L5 perw!dget4 G+ pro.t !s L2 per w!dget, fora total P; of L2 m!ll!on lo$ked !n4
06.5
)05.1(5
)1(25.
=
+=
+= r S F
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"edge: 8edu$e '#posure$ont!nued
►Allow "um to sell a $ustom!@ed forward$ontra$t for 600,000 sares of /(G sto$kw!t e#p!rat!on !n 10 +ears4
►&ons!derat!ons for "um 1? &ounterpart+ 8!sk: "um ma+ reasonabl+
reuest tat a spe$!al a$$ount be pla$ed !n !sname for an+ marked ga!ns >!4e4 !f "(G pr!$e
de$reases?, !n $ase G&(bank goes bankruptw!t!n 10 +ears► oug G&(bank !s a better $red!t, "umNs sares are
eld as $ollateral4
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"edge: 8edu$e '#posure$ont!nued
►Gore $ons!derat!ons for "um 2? &ost for &ustom!@at!on: G&(bank as to make
a pro.t on t!s non)standard forward, so souldoer a pr!$e based on spot)futures par!t+ plus apro.t►In t!s $ase, G&(bank bu+s at a lower pr!$e tan Bfa!rC
►If F 15 a$$ord!ng to spot)futures par!t+, ten forward$ontra$t w!ll spe$!f+ a lower pr!$e ma+be 1450
"um as edged sto$k e#posure on 600U sares w!llre$e!ve 1450-sare on 600U sares regardless of watappens to /(G sto$k pr!$e
G&(bank as lo$ked !n a pro.t above fa!r pr!$e of0450-sare, but !s now e#posed to te sto$k S<
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"edge: 8edu$e '#posure$ont!nued
►Gore $ons!derat!ons for "um *? 8!sk Sar!ng: G&(bank !s not !n te bus!ness
of old!ng !nd!v!dual sto$k r!sk, and w!ll need tounload tat r!sk►Sell forward to anoter Tbank
=ut onl+ at a Forward pr!$e above 1450 ma+be 1435
►G&(=ank w!ll pa+ 1450-sare on 600U sares to "um
►G&(=ank w!ll re$e!ve 1450-sare on 600U saresfrom Tbank
►Sort sares !n te spot market
►(se opt!ons to $reate sort pos!t!on
►<ter
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Spe$ulate on Garg!n
► Hour t!rd $ous!n Teeesper from !mbu$ktoo as adead)end Mob and no edu$at!on4 "e as managedto save L10000 and !s on te wa+ to te gas stat!onto bu+ lotter+ t!$kets4 Unow!ng tat lotter+ t!$ketsare pr!$ed to return about 50 $ents on te dollar,
+ou suggest spe$ulat!ng !n te $rude o!l marketwere at least te odds are even4 'a$ $rude o!lfutures $ontra$t represents 1000 barrels, and ea$barrel $urrentl+ trades at L74 '#posure to ea$futures $ontra$t reu!res L1000 to be pla$ed !n a
marg!n a$$ount4 "ow mu$ e#posure to o!l $an Teesper obta!n Assum!ng e sells te ma#!mumamount of futures and te pr!$e of o!l de$reases toL5 per barrel, wat !s !s pro.t At wat pr!$ewould e be w!ped out >assum!ng no ma!ntenan$emarg!n?
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Spe$ulate $ont!nued
►"e $an obta!n e#posure to 10 $ontra$ts:10 $ontra$ts # L7-barrel # 1000 barrels-$ontra$t
L70,000 of spot $rude o!l e#posure►
If e sorts 10 $ontra$ts and te pr!$ede$reases to L5-barrel, ten e makes L2*-barrel # 10 $ontra$ts # 1000 barrels-$ontra$t
L2*0,000►
"e $an lose up to L10,000L10,000 LD-barrel # 10 $ontra$ts # 1000barrels-$ontra$
D 1
If te pr!$e of a barrel of $rude r!ses L1 to L76,
F t d ' t d S t
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Ti$e
Futures %rices
&ontan'o
or$al Bac*ar"ation
eli!ery "ate
+,%ectations y%othesis
Futures and '#pe$ted SpotPr!$e: eor!es
►F $onverges to S as approa$es If F '>S?, e#pe$tat!ons +potes!s If FY'>S?, $ontango: F de$reases as approa$es If FZ'>S?, normal ba$kwardat!on: F !n$reases as
approa$es
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F vs '>S?
►Dormal =a$kwardat!on '$onom!sts Ue+nes and "!$k sa!d, !tNs BnormalC
for farmers to edge $ommod!t+ outputs b+sort!ng futures4
'nt!$e non)edgers to bu+ futures: lower F below'>S?
►&ontango
<ppos!te to Dormal =a$kwardat!on ere are more natural bu+ers of te $ommod!t+
tan sellersQ te+ need to bu+ futures
'nt!$e non)edgers to sell futures:!n$rease F
above '>S?
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Swaps
►A swap !s a pa!r of forwards %ong one forward Sort anoter forward
Wat !s te total $ost to enter a swap►S!n$e swaps are $ompr!sed of full+
$ustom!@able forwards, te+ ma+ be
spe$!.ed for an+t!ng (nspe$!.ed term BswapC often refers to.#ed for Eoat!ng !nterest rate swap >orbond swap?
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Swaps
► <& so tere !s default r!sk4 =ut amount at r!sk !s d!eren$e !n te swapped values, not full
not!onal► otal 8eturn Swaps
Swap te total return on ADH 2 se$ur!t!es, for te same not!onalamount for ea$ se$ur!t!es
<nl+ te d!eren$e b-w te total return of se$ur!t!es a$tuall+$anges ands, D< te not!onal amount
Do forward pr!$!ng ne$essar+ Must e#$ange total return► e fa!r value of L1mm not!onal !n SP500 !s te same as te fa!r
value of L1mm not!onal !n I=G bonds4 ItNs L1mm not!onalK Tuste#$ange te $as Eows to ea$
► Interest 8ate Swap: .#ed for Eoat!ng Swap te $oupon pa+ment of 2 !dent!$al r!sk bonds, one of w!$
!s .#ed rate and one of w!$ !s Eoat!ng rate Pr!n$!pal and .#ed $oupon w!ll alwa+s be !dent!$alQ Eoat!ng rate
w!ll $ange
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Swap Pr!$!ng
►Swap pr!$!ng !s based on te fa$t tata swap !s s!mpl+ a ser!es of 2 >ormore? forward $ontra$ts
Appl!$able wen a .#ed amount sould bepa!d ea$ per!od >!4e4 not ne$essar+ !n aswap of !nde# total return swaps?
Start b+ pr!$!ng !nd!v!dual forwards, w!$
leads to Eoat!ng values per per!od Set .#ed amount su$ tat d!s$ounted
value euals d!s$ounted value of separateforwards
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Ass!gnment
►8ead &"7►Form ProMe$t roups►'a$ "W group ma+ do te follow!ng:
Sear$ onl!ne or pr!nt news►ADH sour$e►8eal stor!es onl+►Do t!metable >an+ $urrent or !stor!$al e#ample?
=r!ng a pr!nted or $op!ed art!$le about a $ase werefutures-forwards are be!ng used to edge, spe$ulate, orlo$k !n pro.ts►Ident!f+ w!$ of te * strateg!es !s be!ng used►Wr!te a sort summar+ >gu!del!ne 100 words? of te stor+,
!gl!gt!ng te use of futures-forwards !s ass!gnment !s for part!$!pat!on $red!t onl+ /ue ne#t $lass