Financial futures

To reduce the risk of counterparty default, financial futures contracts can be used. They have several characteristics.

  1. A third party involved. The first characteristic of financial futures is to involve an independent third party in the transaction, the future exchange. The contract between e-Bank and Alpha Bank is replaced by two new contracts (legal notion of novation) connecting the two banks with the future exchange (Figure 14.1).

    Figure 14.1. The role of the future exchange

    The counterparty risk between the two banks has been replaced by a counterparty risk with the exchange. This one has usually very strong shareholders ...

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