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What is a credit risk when entering into a derivative contract?
Credit Risk. Credit risk or default risk evolves from the possibility that one of the parties to a derivative contract will not satisfy its financial obligations under the derivative contract.
What is a basic risk when entering into a derivative contract?
Basis Risk. This is the spot (cash) price of the underlying asset being hedged, less the price of the derivative contract used to hedge the asset.
What is an embedded derivative?
A component of a hybrid security that is embedded in a non-derivative instrument. An embedded derivative can modify the cash flows of the host contract because the derivative can be related to an exchange rate, commodity price or some other variable which frequently changes. For example, a Canadian company might enter into a sales contract with a Chinese company, creating a host contract. If the contract is denominated in a foreign currency, such as the U.S. dollar, an embedded foreign currency derivative is created. According to the International Financial Reporting Standards (IFRS), the embedded derivative has to be separated from the host contract and accounted for separately unless the economic and risk characteristics of both the embedded derivative and host contract are closely related.
What type of derivative instrument is a forward-based contract in which two parties agree to exchange streams of payments for a specified period of time?
A forward-based contract in which two parties agree to exchange streams of payments for a specified period of time is known as a "swap." Swaps are derivative instruments that typically involve the exchange of cash flows, which can be based on interest rates, currencies, or commodities. These agreements allow parties to hedge risk or speculate on changes in market conditions over the contract's duration.
What are derivative liabilities?
Derivative liabilities are financial obligations that arise from derivative contracts, such as options, futures, and swaps. These liabilities represent the potential future outflows of cash or other assets that a company might face if the market moves against its position in the derivative. They are recorded on the balance sheet at fair value and can fluctuate based on changes in market conditions. Essentially, they reflect the company's exposure to market risks and are an important aspect of managing financial risk.
What rolling forward contract is known?
A rolling forward contract is a financial agreement that allows parties to extend the maturity of a forward contract by simultaneously closing out the existing contract and entering into a new one with a later expiration date. This type of contract is commonly used in foreign exchange and commodities markets to manage risk and maintain exposure over time. By rolling forward, participants can adapt to changing market conditions while avoiding the need to settle the contract.
What do you mean by derivative?
A derivative can be defined as something which derives its value from an underlying product being a stock, currency, commodity or anything that carries a market price.The market price of a product is subject to fluctuations due to various factors effecting its demand & supply thereby associating itself to various risk factors.SO, derivative is a by-product of the core product which can be used to hedge, speculate & also undertake arbitrage activities.
What is the meaning of share derivetives?
Derivative means how to minimize the risk of shares in stock market and how to earn more money. There are two types of derivatives. 1. Future 2. Option
What is forward premium How does the forward market help in reducing currency risk in international business?
The forward premium arises due to interest differentials between two currencies. In order that the two currencies have the same intrinsic values as they have today and avoid interest arbitrage, the premium/discount comes into effect.The forward rate includes the forwrd premium/discount and so the risk of spot market moving in the wrong way is minimised by entering into a forward contract.
The market risk premium is measured by?
The market risk premium is measured by the market return less risk-free rate. You can calculate the market risk premium as market risk premium is equal to the expected return of the market minus the risk-free rate.
What is hedging tools?
Hedging tools are those tools which helps to mitigate the risk in the market. For e.g. Future Contract, Swap, Option etc.
What has the author Manuel Ammann written?
Manuel Ammann has written: 'Credit risk valuation' -- subject(s): Credit, Credit ratings, Management, Risk management 'Pricing derivative credit risk' -- subject(s): Derivative securities, Prices, Mathematical models, Credit, Risk
