Financial Times Handbook of Corporate Finance, 2nd Edition

20

USING FUTURES, FORWARDS AND SWAPS TO MANAGE RISK

IntroductionFuturesShort-term interest rate futuresForwardsForward rate agreements (FRAs)A comparison of options, futures and FRAsCapsSwapsDerivatives usersOver-the-counter (OTC) and exchange-traded derivativesConclusionWebsitesNotes

Introduction

There are two main classes of derivative contracts. First there are those where you have a right but not the obligation to go ahead with a transaction – options. Given that the future is uncertain and that the right to abandon may turn out to be valuable you are obliged to pay the option writer a premium. Option writers expose themselves to unfavourable outcomes because they grant you the right to go ahead with the deal if it is favourable to you; ...