Answer the following questions $($submit in a Word or PDF$,$ format$)$:

Describe the general characteristics of a futures contract. How does a clearinghouse facilitate the trading of financial futures contracts?

Explain how purchasers of financial futures contracts can offset their position. How is their gain or loss determined? What is the maximum loss to a purchaser of a futures contract?

Explain how institutional investors hedge with interest rate futures, and the tradeoff involved.

Explain how stock index futures can be used by institutional investors.

Explain the difference between a long hedge and a short hedge used by financial institutions. When is a long hedge more appropriate than a short hedge?

Describe the general differences between a call option and a futures contract.

Identify the factors affecting the premium paid on a call option. Describe how each factor affects the size of the premium.

Describe a call option on interest rate futures. How does it differ from purchasing a futures contract?

Explain the types of cash flow characteristics that would cause a firm to hedge interest rate risk by swapping floating$-$rate payments for fixed payments.

Chelsea Finance Company receives floating inflow payments from its provision of floating$-$rate loans. Its outflow payments are fixed because of its recent issuance of long$-$term bonds. Chelsea is concerned that interest rates will decline in the future. Yet, it does not want to hedge its interest rate risk, because it believes interest rates may increase. Recommend a solution to Chelsea$$s dilemma.

Markus Company purchases supplies from Europe once a year. Would Markus be favorably affected if it establishes a currency swap arrangement and the dollar strengthens? What if it establishes a currency swap arrangement and the dollar weakens?

Explain how various foreign exchange derivatives can be used to hedge against exchange rate movements.

Explain how arbitrage can assure that currency values are not mispriced.