11. Exchange vs. Bilateral Trading Difficulty in price dissemination Market prices available to wider world Counter party credit risk Absence of counter party credit risk High cost and time consuming negotiations Low transaction costs Traded prices unknown to other players Price transparency Restricted access Common platform for all traders Bilateral trading Exchange
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17. Short Hedge- Example contd… Profit Rs. 25/Kgs -- Profit Rs. 25/Kgs Case 2 - Rs. 305/Kgs Loss Rs. 10/Kgs -- Loss Rs. 10/Kgs Case 1 - Rs. 270/Kgs Without Hedge Profit Rs. 15/Kgs Loss Rs. 10/Kgs Profit Rs. 25/Kgs Case 2 - Rs. 305/Kgs Profit Rs. 15/Kgs Profit Rs. 25/Kgs Loss Rs. 10/Kgs Case 1 - Rs. 270/Kgs Net Result Future Spot 30 th Dec With Hedge (You rule out a loss) Sell Buy/Hold 30 th Nov Rs. 295/Kgs Rs. 280/Kgs 30 th Nov Future Spot Date
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19. Long Hedge - Example contd… Loss Rs. 25/Kgs -- Loss Rs. 25/Kgs Case 2 - Rs. 305/Kgs Profit Rs. 10/Kgs -- Profit Rs. 10/Kgs Case 1 - Rs. 270/Kgs Without Hedge Loss Rs. 15/Kgs Profit Rs. 10/Kgs Loss Rs. 25/Kgs Case 2 - Rs. 305/Kgs Loss Rs.15/Kgs Loss Rs. 25/Kgs Profit Rs. 10/Kgs Case 1 - Rs. 270/Kgs Net Result Future Spot 30 th Dec With Hedge (You rule out a loss) Buy Wait till Nov 30 th Nov Rs. 295/Kgs Rs. 280/Kgs 30 th Nov Future Spot Date