Saturday, September 30, 2006

Let ignorance of the futures be a thing of the past!

Book Value

Futures Markets: Made Easy with 250 Questions and Answers
Sunil K. Parameswaran
Tata McGraw-Hill (www.tatamcgrawhill.com)

Into the exotic world of futures

A numerical illustration given in the book should make things clearer. "Mitoken Solutions has entered into a forward contract with ICICI Bank to acquire $1,00,000 after 90 days at an exchange rate of Rs 45.50 per dollar," it begins. After 90 days, "the company will be required to pay Rs 45,50,000 to the bank and in lieu accept the dollars." And, "as per the contract, the bank will have to accept the equivalent amount in Indian currency, and deliver the dollars." The underlying asset is the dollar, in this case. The main parties to the deal are ‘long,' the person who agrees to buy the underlying asset, and the opposite ‘short,' the one who agrees to sell.

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