30th july 2015
Thursday, left my house at 6.45 and surprisingly got to the office by 7:30. Today is environmental so I am sure that is the reason I was able to get to the office that early considering the time I left my house. I got to the office and filled some petty cash vouchers then after that, not much to do again so as I was about reading, a colleague of mine in the marketing unit asked me if I could help her edit some pictures that they took of people that wanted to open Rsa (Retirement Savings Account) accounts with them. They snapped it with a phone, and they were a lot of distracting objects in the background. They needed a clear white background and instinctively they knew that I was the man for the job.

They were ten in number and it took me some time to do. My back was sore from sitting down too long. I would occasionally stand up just to stretch. Finally I was done with it. Then that was when my department knew that they would bring deal tickets for me to type. Like 20 of them, but I was still able to finish them before the closing time.

When I got home, I just crashed into my bed and was too tired to do anything. They woke me up to eat, but I just kept it by the side of my bed untouched. I later woke up and read sha.

I read about forward contracts

Forward Contracts 

A forward contract is an agreement between two parties, in which one party agrees to buy from the other party an underlying asset or other derivative at a future date at a price established at the start of the contract.
The buyer is called the long and the seller is called the short. In a forward contract, the buyer hedges risk of paying more for an appreciation in the value of an asset. For example a pension fund enters into an agreement to purchase a stock portfolio at a later date at a price agreed on today. The fund might enter into such deals because it is not liquid and does not have enough cash to make the investment. So to hedge the risk of an appreciation in the value of the stock, the pension fund enters into such commitments and if there is an increase the fund gains.
But there is also a risk of depreciation in the value of an asset, and in this situation, the fund loses because the price the fund pays is fixed, so the fund loses when the asset depreciates. In a forward contract, neither party pays any money at the start. On expiration of a forward contract, there are two possible arrangements that can be used to settle the obligations of the parties.

Deliverables: A deliverable forward contract stipulates that the long (buyer) will pay the short (seller) who would in turn deliver the underlying asset to the long.

Cash settlement: In this type of forward contract, there is an agreement that in a case where the underlying price of an asset falls, the long and short pays the net cash value of the position on the delivery date. For example, supposing two parties agree to a forward contract to deliver a zero coupon bond at a price of #95 per #100 at par, at the contract’s expiration, if the underlying zero coupon bond is selling at a price of #98, The buyer is due to receive from the seller an asset worth #98 and pay the #95 previously agreed on. In a cash settled forward contract, the seller pays the buyer #3 and if the per value of the bond has fallen to a price lower than that #95 for example #94.50, then the buyer would pay the #0.50 difference.

In a forward contract, the parties hold on to their position until the contract expires, and then they deliver the asset or settle cash as the contract stipulates. In a forward contract, there is always a risk of termination by at least one of the party members, the long may for example wish to terminate the contract maybe because she is no longer interested in the asset or any other reason, but since she has entered into it and there needs to be an agreement by both parties for the termination of the contract, she is then obligated to deliver.

She can then enter into another contract at the same forward rate as a seller that is going short at the same date of the first contract. Then on expiration of the contract, she counters the first with the second contract and ends up not paying for or receiving any asset. She might as well sell it higher when short than what she bought it when long in order to profit on the contract.

Types of forward contracts

Types of forward contracts include:
1) Equity forward: These are contracts entered into to purchase an individual stock, a stock portfolio or a stock index at a later date.

2) Bond and interest rate forward: A bond carries a risk of default, so a forward contract on a bond must contain a provision to recognize how default is defined, what it means for the bond to default, and how default would affect the parties to the contract.

 

Recommended Reading

Don M. Chance., Analysis of Derivatives for the CFA program