CATACUTAN, Joyce B,

11107928
RISKFIN Homework
Give the definitions of the following:
1. Forwards
A forward is a customized contract between two parties to buy or sell an
asset at a specified price on a future date. A forward contract can be used for
hedging or speculation, although its non-standardized nature makes it particularly
apt for hedging. Unlike standard futures contracts, a forward contract can be
customized to any commodity, amount and delivery date. A forward contract
settlement can occur on a cash or delivery basis. Forward contracts do not trade
on a centralized exchange and are therefore regarded as over-the-counter (OTC)
instruments. While their OTC nature makes it easier to customize terms, the lack
of a centralized clearinghouse also gives rise to a higher degree of default risk.
As a result, forward contracts are not as easily available to the retail investor as
futures contracts.1
2. Swaps
A swap is an exchange of one security for another to change the maturity
(bonds), quality of issues (stocks or bonds), or because investment objectives have
changed. Recently, swaps have grown to include currency swaps and interest rate
swap.2
3. Non-Deliverable Forwards
A non-deliverable forward is a cash-settled, short-term forward contract on a
thinly traded or non-convertible foreign currency, where the profit or loss at the time
at the settlement date is calculated by taking the difference between the agreed upon
exchange rate and the spot rate at the time of settlement, for an agreed upon
notional amount of funds.3
4. Call Options
A call option is an agreement that gives an investor the right (but not the
obligation) to buy a stock, bond, commodity, or other instrument at a specified price
within a specific time period.4
5. Put Option

1 http://www.investopedia.com/terms/f/forwardcontract.asp
2 http://www.investopedia.com/terms/s/swap.asp
3 http://www.investopedia.com/terms/n/ndf.asp
4 http://www.investopedia.com/terms/c/calloption.asp

An option contract giving the owner the right, but not the obligation, to sell a
specified amount of an underlying security at a specified price within a specified
time. This is the opposite of a call option, which gives the holder the right to buy
shares.5
6. Credit Default Swaps
A swap designed to transfer the credit exposure of fixed income products
between parties. A credit default swap is also referred to as a credit derivative
contract, where the purchaser of the swap makes payments up until the maturity
date of a contract. Payments are made to the seller of the swap. In return, the seller
agrees to pay off a third party debt if this party defaults on the loan. A CDS is
considered insurance against non-payment. A buyer of a CDS might be speculating
on the possibility that the third party will indeed default.6

7. Credit Linked Notes

A credit-linked note is a security with an embedded credit default swap allowing
the issuer to transfer a specific credit risk to credit investors. 7
8. Anatomy of Risks

5 http://www.investopedia.com/terms/p/putoption.asp
6 http://www.investopedia.com/terms/c/creditdefaultswap.asp
7 http://www.investopedia.com/terms/c/creditlinkednote.asp