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Forwards vs Futures
- Forwards: private contracts, unique contracts, default risk, little or no regulation
- Futures: exchange traded, standardized contracts, guaranteed by clearinghouse, regulated, daily settlement of gains/losses
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Forward rate agreement
- Agreement to borrow/lend money in the future
- Formula for payment to the long is:
- principal*(floating rate - forward rate)*(days/360)/(1 + floating rate*days/360)
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Put-Call Parity
Call + X/(1+Rfr)^t = Stock + Put
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ETFs, advantages, disadvantages
- ETFs: invests in a portfolio of stocks or bonds, designed to mimic a specific index
- Advantages: efficient method of diversification, trade similar to equities, risk management, efficient operating expense ratios, decrease capital gains tax liabilities
- Disadvantages: foreign countries have few indexes to track, intraday trading may be insignificant to long-term investors, low trading volume can create large bid-ask spreads
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Real estate investments
- NOI = gross operating income - estimated vacancy, collections, and other operating expenses including property taxes. Does not include depreciation or finance costs
- Value = NOI/market cap
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Currency swap
- A wants AUD, B wants USD
- Notional principal initially changes hands: A gives B USD, B gives A AUD
- Interest payments are made without netting due to different currencies: A pays interest on AUD, B pays interest on USD
- Notional amounts returned: same as initially swapped, regardless of how exchange rates have changed
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