Exchange of physicals, Financial Management

Assignment Help:

Exchange of Physicals:

A trader can also complete the futures contract by engaging in exchange of physicals. In this method, the parties agree to exchange cash and the commodity underlying the contract. A baker who genuinely requires wheat and a farmer who has wheat can mutually agree on a price for the wheat, so that the exchange can take place, in the process facilitating both the traders to cancel their complementary futures position against each other. The exchange notes their positions and cancels their futures obligations.

This method is quite similar to the offsetting method, but differs from it in the following manner:

  1. the traders actually exchange physical goods;
  2. the transaction or the mutual agreement does not take place on the floor of the exchange; and
  3. there may be no intermediaries to negotiate the deal.

Keeping the above points in view, an exchange for physical is also called "Ex-pit" transaction or "Against actuals" or "Versus cash" transaction and is recognized by the Federal laws and Exchange rules.

In the discussion on margins, we considered the manner in which the margins are calculated for a futures contract. However, this was only for a single contract. In the real world, traders seldom deal in single contracts. Since the objective of margins is to protect the trader, the broker and the clearing house against losses, it will make sense to ask traders to pay margins depending on: (i) his cumulative position; and (ii) the risk he is exposed to in different markets. Certainly, it will improve the liquidity position and also release the funds locked up in margins.

 


Related Discussions:- Exchange of physicals

Define modern approach of financial management, Define Modern Approach of f...

Define Modern Approach of financial management Modern approach views the term financial management in a broad sense and provides a conceptual and analytical framework for fina

Capitalization ratios, Capitalization ratios are used for determining the e...

Capitalization ratios are used for determining the extent to which the corporation is trading on its equity, and the resulting financial leverage. These ratios

Help with 4 questions, I need assistance with 4 questions. How do I know s...

I need assistance with 4 questions. How do I know someone can help me and have some idea of what it would cost before submitting the information? Also, how fast is the turnaround

Show limitations of profit maximization, Q. Show Limitations of Profit maxi...

Q. Show Limitations of Profit maximization? The Profit maximization criterion is criticized on the following grounds: i) Quality of Benefits: Profit maximization approach ig

Aeromag, Our geologist, Rebecca Paulka, has estimated from the earlier expl...

Our geologist, Rebecca Paulka, has estimated from the earlier exploration that the Malian prospects have a 30% likelihood of containing economic quantities of uranium ore, the Nige

Calculate volatilities by using a risk free interest rate, 1. In this query...

1. In this query the implied volatilities are calculated by using a risk free interest rate of 2%. The computation are summarized by the following figure. 2. The computatio

Preparing the divestiture, Preparing the Divestiture No two divestiture...

Preparing the Divestiture No two divestitures are exactly alike and one of the foremost tasks of the project team is to determine precisely what is to be sold. While some dives

Define finance function and discuss its nature, Q. Define Finance Function ...

Q. Define Finance Function and discuss its nature and scope Ans. Meaning of Finance: - Finance is defined as the provision of funds at the time when it is required. The role of

Long-term debt finance, The approaches that Blin could accept regarding the...

The approaches that Blin could accept regarding the relative proportions of long- and short-term finance to meet its working capital needs have been described as moderate, conserva

Performance evaluation, Performance evaluation One can determine this b...

Performance evaluation One can determine this by comparing the cash flow from assets and cost of capital. 1. Cash flow from assets Cash flow from assets is calculated

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd