Microsoft PowerPoint - PoF.ppt

Problemsƒ 146

Main problems associated with forwards (due to OTC)

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non-standardized products; tailor made contracts

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relative high transaction cost

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relative high credit risk/default risk

Ä

illiquidity

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Would also be nice to have

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relative low transaction cost

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relative low credit risk/default risk

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liquid secondary market

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futuresThese attributes of futures are achi

eved through standardization since

standardization enables securities to be traded on an exchangeBUTstandardization also involves some diffi

culties especially w.r.t. hedging.

Derivative securities: Forwards - Problems