I need to know the different hedging techniques for an exam but can't get my head around futures. Does anyone know a simple way to understand them?|||Easy .. as every kid knows, 'sweeties today' is worth MORE than 'sweeties tomorrow' ... and 'sweeties tomorrow' is worth more than 'sweeties next month' ... and 'next months sweeties' are worth more that 'next years' ...
'Futures' is simply a way of putting value on that difference ...|||A futures contract is where you agree to buy a specified financial asset at a specified price at a future date. And this can be affected by underlying items in your case interest rates.
For example, borrowers face the risk of interest rates rising. Futures use the inverse relationship between interest rates and bond prices to hedge against the risk of rising interest rates. A borrower will enter to sell a future today. Then if interest rates rise in the future, the value of the future will fall (as it is linked to the underlying asset, bond prices), and hence a profit can be made when closing out of the future (i.e buying the future).
hope that makes sense, financaial instruments are so complicated!!
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