Compounding effect and Futures contract: Difference between pages

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The additional growth or additional interest, resulting from the compounding effects of - for example - interest on interest.
A standardised foreign exchange, interest rate or other contract written against the exchange clearing house for a standard fixed number of units and for delivery on a fixed date.
 
 
For example, interest quoted at 6% per annum, compounded annually, for two years maturity, means that the interest accumulated after two years is:
 
= [1.06 x 1.06] - 1
 
= 12.36% for the two year period.
 
 
Without the additional interest on interest, the total interest would have been simply
 
6% per annum x 2 years
 
= 12.00%.
 
 
So the compounding effect of interest on interest here
 
= 12.36% - 12.00%
 
= 0.36% over the two year period (= 6% x 6%).
 
 
When both the number of periods and the rate of growth/interest are low, compounding effects are relatively small.
When either the number of periods or the rate of growth/interest - or both - are greater, compounding effects become very much larger.


Because of their standardisation, futures contracts have a deep secondary market.


== See also ==
== See also ==
* [[Compound interest]]
* [[Fixing instrument]]
* [[Compounding factor]]
* [[Forward contract]]
* [[Continuously compounded rate of return]]
* [[Futures]]
* [[Margin call]]
* [[Open interest]]


[[Category:Manage_risks]]

Revision as of 14:19, 23 October 2012

A standardised foreign exchange, interest rate or other contract written against the exchange clearing house for a standard fixed number of units and for delivery on a fixed date.

Because of their standardisation, futures contracts have a deep secondary market.

See also


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