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:**
\begin{equation}
(1+\frac{r_{discrete}}{m})^{mT} \rightarrow e^{r_{continuous}} \ as \ m \ \rightarrow \infty
\end{equation}

**Value of a Forward Contract:**

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

Were:

\begin{equation} S_{Initial Security Price} \end{equation}

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