Post on 26-Oct-2014
transcript
An arbitrageur is an intelligent trader who attempts to make profi t in a derivative market by simultaneously entering into two transactions at a time in two diff erent markets and takes advantage of the diff erence in pricing. (sometimes due to reckless trading by speculators).
The arbitrage opportunities available in two markets usually do not last long because of heavy transactions by arbitrageurs when such opportunity arises .
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A speculator may be defined as an investor who is willing to take a risk by taking derivative position with the expectation to earn profi ts.
The speculator forecasts the future economic conditions and decides which position (long or short) to be taken that will yield a profi t if his forecast is correct.
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Brief Story- Barings Bank
Arbitrary - derivative trading of Singapore and Japan
Nikkei 225 contract traded
on SIMEX and OSE
10 –year JGB (Japanese government bonds)
contract dealt in SIMEX and OSE.
3-month Euroyen contract dealt in SIMEX and TIFFE (Tokyo Financial Futures Exchange) in the Japan.
Derivatives
1 2 3
Derivative trading strategy
Hedging• Interchange-arbitrary
Brief Story- Barings Bank
strategy implemented
Buy and sell Nikkei
225 futures
contracts simultane
ously
Gain the
arbitrate profit
Inter-exchange arbitrate strategy
Long/short future position long Nikkei 225 futures on both SIMEX and OSE short Japanese government bond futures short position in Euroyen futures
SPECULATION
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Performance of Nikkei 225 after Kobe earthquake
Straddle strategy Leeson’s strategy amounted to a bet that the Japanese stock market would neither fall nor increase by a great deal—any large movement in Japanese stock prices would result in losses
simultaneous sale of both calls and puts onNikkei-225 futures
Leeson's Positions as at End February 1995.
Number of contracts1
nominal value in US$ amounts Actual position in terms of open interest of relevant contract2
Reported3 Actual4
Futures
Nikkei 225
30112$2809 million
long 61039$7000 million
49% of March 1995 contract and 24% of June 1995 contract.
JGB15940$8980 million
short 28034$19650 million
85% of March 1995 contract and 88% of June 1995 contract.
Euroyen601$26.5 million
short 6845$350 million
5% of June 1995 contract, 1% of September 1995 contract and 1% of December 1995 contract.
Options
Nikkei 225
Nil
37925 calls$3580 million32967 puts$3100 million
1. Expressed in terms of SIMEX contract sizes which are half the size of those of the OSE and the TSE. For Euro yen, SIMEX and TIFFE contracts are of similar size.2. Open interest figures for each contract month of each listed contract. For the Nikkei 225, JGB and Euroyen contracts, the contract months are March, June, September and December.3. Leeson's reported futures positions were supposedly matched because they were part of Barings' switching activity, i.e. the number of contracts on either the Osaka Stock Exchange, or the Singapore International Monetary Exchange or the Tokyo Stock Exchange.4. The actual positions refer to those unauthorized trades held in error account '88888'. Source: The Report of the Board of Banking Supervision Inquiry into the Circumstances of the Collapse of Barings, Ordered by the House of Commons, Her Majesty's Stationery Office, 1995