There are used to cover or reduce any risk, but they can also reduce the returns.

The main difference between Forward and Future is the Forward is a contract, that the buyer and seller agreed to do an exchange (delivery xx quantity for xx money in the Date xx) there is no money exchange until the time T, the Future is a financial instrument that is traded in the Market and can do margin calls, to save liquidity risk (are marked to market).

#### Some of the hedgeable risk:

• Commodity Risk
• Credit Risk
• Currency Risk
• Interest Rate Risk
• Equity Risk
• Volatility Risk
• Volumetric Risk

Long and Short Positions: The buyer (long position) and The Seller (Short position).

Margin: It is an amount of money larger than the usual one-day movement. In intra day movement you can receive or add money, to maintain a fixed percentage "secure".

#### Valuation of Forward Contracts

To valuate a forward contract, the base principle is NO-ARBITRAGE that means all the alternatives now values the same amount of money, so can be placed in a simple present-future value formula.

Spot price: Is the price of the of the transable object now.

Future price: Is the price of the of the transable object in the future.

Continuous Compounding Interest Rate: $$(1+\frac{r_{discrete}}{m})^{mT} \rightarrow e^{r_{continuous}} \ as \ m \ \rightarrow \infty$$

Value of a Forward Contract:

$$f_0 = (S_{Initial Security Price}-K_{Delivery Cost}-U_{Storage Cost})e^{(r_{f}-q_{Dividend})T}$$

Were:

$$S_{Initial Security Price}$$

Is the spot price $$K_{Delivery Cost}$$ and  $$U_{ Storage Cost }$$ are the present value of the respective cost.