Derivatives

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Basic Knowledge about Derivatives
Transcript:
  • Derivatives Group 4 Teacher: Ms. Bui Thi Kim Phuc
  • 1. Future Dung Do 2. Forward Loan Dang 3. Hedging and Speculation Truc Mai Nguyen 4. Option (Call) Sam Hoang 5. Option (Put) Phuong Mai Pham 6. Warrants Hang Nga Nguyen 7. Swap Ngoc Huyen Nguyen
  • Definition Types When to apply Strengths & Weaknesses
  • Definition Contracts to buy or sell fixed quantities of a commodity, currency, or financial assest at a future date, at a price fixed at the time of making contract.
  • Types Commodities futures Metals Energy Grains & Oil Seeds Livestocks Food & Fiber Financial futures Eurodollar Futures U.S. Treasury Futures Foreign Government Debt Futures Swap Futures Forex Futures Single Stocck Futures Index Futures
  • When to appy Example:(clip)
  • When to appy Three Main Uses: Capital Appreciation Leverage Hedge Against Risk
  • Strengths & Weaknesses Futures are extremely useful in reducing unwanted risk. Futures markets are very active, so liquidating your contracts is usually easy.
  • Strengths & Weaknesses Being considered one of the riskiest investments in the financial markets - they are for professionals only. In volatile markets - very easy to lose your original investment. The very high amount of leverage can create enormous capital gains and losses, you must be fully aware of any tax consequences
  • Conclusion
  • Definition Distinct feature Function Case
  • Definition A contract between two parties to buy or sell an asset at a specified future time at a price agreed upon today. THE SELLER THE BUYER Future real transaction Todays price
  • Case FARMER A
  • Distinct feature Non- standardized Over-the-counter a zero-sum game
  • Function Control liquility risk Speculation
  • Activities Game 1: FORWARD vs. FUTURE Game 2: Vocabulary
  • Activities A FORWARD TRANSACTION B FUTURE TRANSACTION over-the-counter highly standardized privately negotiated zero counterparty risk traded in a secondary market FORWARD VS. FUTURE COLUMN A COLUMN B
  • Activities Words guessing Is likely to take place in FORWARD TRANSACTION rather than future transaction There are 2 WORDS: first one has 12, second one has 4 LETTERS Exists because participants may be unwilling or unable to follow through the transaction at the time of settlement. Appears when one party BREAKS the terms of the agreement. This is a kind of UNCERTAINCY facing in any transaction.
  • Activities The first word is FOUR- SYLLABLE word. It is a combination of 2 COMPONENTS MEANING: against/ opposite one site in a contract The second word means THE POSSIBILITY OF Sth BAD HAPPENING AT SOME TIME IN THE FUTURE COUNTERPARTY RISK
  • Activities It is a contract struck today, for the physical borrowing of funds at a fixed future date. The THIRD single word means LOANING. Containing 3 single words: the FIRST and the SECOND WORDS are exactly the same and are my topics name. Used in purpose of AVOIDING RISK caused by the votality of exchange rate. FORWARD FORWARD BORROWING
  • Definition1 Characteristic2 Comparison between Hedging and Speculation3
  • Definition A method of reducing the risk of loss caused by price fluctuation A transfer of risk without buying insurance policies equal quantities of the same commodities reduce risk by making a transaction in one market to protect against a loss in another equal quantities of the same commodities
  • Characteristic 1. Everyone who seek to profit from price fluctuation 2. Producers, processors, and wholesalers 3. Retailers, distributors 4. Only producers
  • Characteristic reduction in RISK reduction in PROFIT The goal of hedging is not to make money but to protect from losses.
  • Characteristic Futures Options Forwards
  • Example Use futures contracts to hedge their exposure to the price of jet fuel to save a large amount of money when buying fuel as compared to rival airlines when fuel prices in the U.S. rose dramatically after the 2003 Iraq war and Hurricane Katrina
  • (1). reduce their risk by taking an opposite position in the market to what they are trying to (2)..... The ideal situation in (3)... would be to cause one effect to cancel out another.
  • (1).has to do with short-term expectations. When you (2).., you hope and anticipate that you will be able to make a profit from the short-term fluctuations in price of a particular thing. (3)wants to make money in a hurry.
  • Definition The activity of buying shares, property, goods, etc. in the hope of making a profit by selling them at a higher price With the risk of losing money
  • Comparison between HEDGING and SPECULATION Risk averse To protect from losses Risk lovers To make a profit
  • Characteristic Take advantage of an expected price movement Extremely risky Cause harm to other market participants
  • ??? Now 12/2013 Mark Phil
  • What type of derivatives should Mark choose? C A L L O P T I O N
  • Definition How call option works and how to use call option Game & Conclusion
  • 1 FREE ICE CREAM SCOOP OF HAAGEN-DAZS
  • Mark Phil Buy the call option at 1$ 5 $ 430$/share 425$/share Profit = [430-(425+1)]*100 = 400$ 2 months later EXERCISE THE OPTION
  • Mark Phil Buy the call option at 1$ 425$/share Loss= 1 * 100 = 100$ 2 months later 5$ 420$/share
  • In call options trading, the option holder has the (1), but not the (2) , to buy the underlying instrument at a specified price on or before a specified date in the future. O B L I G A T I O N (1) (2) R I G H T
  • If Mark decides to buy or sell the underlying instrument (rather than allowing the contract to expire worthless or closing out the position), he will .... the option, and make use of the right available in the contract. E X E R C I S E
  • is the total cost of an option? P R E M I U M
  • An option that can be exercised anytime during its life ? A M E R I C A N O P T I O N
  • 1 FREE ICE CREAM SCOOP OF HAAGEN-DAZS
  • Call Option = Buying The Right (Not Obligation) To Buy An Underlying Asset CONCLUSION Use When You Expect The Price Of The Stock Is Going To Rise
  • Definition When to apply Put option? Some tips to apply PUT OPTION and CALL OPTION
  • This kind of option is the opposite of call option. This option gives the right to..security (or a currency, or a commodity) at a certain price during a certain period of time Definition
  • WHEN TO APPLY PUT OPTION?
  • A Sample Quiz: Now: a share is worth $100 As prediction: share will be worth above $100 Adversely, Bs prediction: share will be worth below $100 When to apply PUT OPTION ?
  • A sells (or writes) B a put option at $100 (strike/exercise price). B pays A $1 as the premium of put option B has the right to sell the share at $100 (strike/exercise price) in the future whatever the market price wil be. A B Put option at $100 Premium of $1 When to apply PUT OPTION ?
  • Scenario 1: In the future Market price (MP) = 130 > Strike price (SP) =100 B (will/will not) exercise his put option because if he (did not exercise/exercised) his put option, he would lose an amount of $30 (= $130-$100) Outcome: - A (earns/loses) premium of $1 in-the-money - B (earns/loses) premium of $1 out-of-the- money When to apply PUT OPTION ?
  • Scenario 2: in the future MP = 90 < SP = 100 B (will/will not) exercise his put option Outcome: - A (earns/loses) premium of $1, but (earns/loses) an amount of $100 overall, A (earns/loses) $99 out-of-the-money - B (earns/loses) premium of $1, but (earns/loses) an amount of $10 (=$100- $90) overall, B (earns/loses) $9 in-the-money When to apply PUT OPTION ?
  • Prediction: MP will INCREASE in the future BUY the CALL option SELL/WRITE the PUT option Prediction: MP will DECREASE in the future BUY the PUT option SELL/WRITE the CALL option Some tips to apply PUT OPTION and CALL OPTION smartly?
  • Definition Classification Comparison between warrant and option
  • Definition 2012
  • Definition Warrant is a type of investment that gives you the right to buy shares at a fixed price on or by a particular date. A warrant gives you the right, but not the obligation to buy (call) or sell (put) a pre-determined asset at a pre-determined price (=exercise /strike/striking price) by a pre-determined date. OXFORD DICTIONARY STANDARD BANK OF SOUTH AFRICA
  • Classification The warrants can be exercised at any time up to and including the date of expiry United States - style warrants The warrants may be exercised only on the expiry date. European - style warrants
  • Classification At-the-money In-the-money Out-of-the-money When a warrants with an exercise price is equal to the current market price of the underlying When a warrants with the exercise price is at below the current market price of the underlying asset When a warrants with the exercise price is at above the current market price of the underlying asset
  • Comparison Warrants Option Issued by private parties Issued by a public options exchange When a warrants is exercised Company issues new shares of stock The number of shares increases No voting right Warrants lifetime is measured in years The number of shares is constant (the owner of the call option receives an existing share) => Voting right Options life is measured in months
  • Definition7.1 Purposes7.2 Types of SWAPS7.3 Interest rate swaps7.2
  • Definition Definition A swap is an agreement between two counterparties to exchange two streams of cash flows for a set period of time.
  • Purposes Hedging Speculation Changing the character of an asset or liability without liquidating that asset or liability.
  • Types of SWAPS Types of SWAPS Interest Rate Swap Currency Swap Credit Default Swap Forward swap Total return swap Circus swap Commodity swap Asset swap (http://www.businessanalystfaq.com/whatiss wap-typesofswaps.)
  • Interest Rate Swaps Definition: an exchange of cash flows, CFs. a legal arrangement between two parties to exchange specific payments. involving the exchange of fixed-rate payments for floating-rate payments.
  • EXAMPLE Fixed-rate payer pays 5.5% every six months Floating-rate payer pays LIBOR every six months Notional Principal = $10 million Effective Dates are 3/1 and 9/1 for the next three years
  • EXAMPLE 1 2 3 4 5 6 Effective Dates LIBOR Floating-Rate Fixed-Rate Net Interest Received Net Interest Received Payer'sPayment* Payer'sPayment** by Fixed-Rate Payer by Floating-Rate Payer Column 3 - Column 4 Column 4 - Column 3 3/1/Y1 0.045 9/1/Y1 0.050 $225,000 $275,000 -$50,000 $50,000 3/1/Y2 0.055 $250,000 $275,000 -$25,000 $25,000 9/1/Y2 0.060 $275,000 $275,000 $0 $0 3/1/Y3 0.065 $300,000 $275,000 $25,000 -$25,000 9/1/Y3 0.070 $325,000 $275,000 $50,000 -$50,000 3/1/Y4 $350,000 $275,000 $75,000 -$75,000 * (LIBOR/2)($10,000,000) ** (.055/2)($10,000,000)
  • EXAMPLE Points: If LIBOR > 5.5%, then receives the interest differential. If LIBOR < 5.5%, then ..receives the interest differential.
  • EXAMPLE 1 2 3 4 5 6 Effective Dates LIBOR Floating-Rate Fixed-Rate Net Interest Received Net Interest Received Payer'sPayment* Payer'sPayment** by Fixed-Rate Payer by Floating-Rate Payer Column 3 - Column 4 Column 4 - Column 3 3/1/Y1 0.045 9/1/Y1 0.050 $225,000 $275,000 -$50,000 $50,000 3/1/Y2 0.055 $250,000 $275,000 -$25,000 $25,000 9/1/Y2 0.060 $275,000 $275,000 $0 $0 3/1/Y3 0.065 $300,000 $275,000 $25,000 -$25,000 9/1/Y3 0.070 $325,000 $275,000 $50,000 -$50,000 3/1/Y4 $350,000 $275,000 $75,000 -$75,000 * (LIBOR/2)($10,000,000) ** (.055/2)($10,000,000)
  • EXAMPLE Points: If LIBOR > 5.5%, then fixed payer receives the interest differential. If LIBOR < 5.5%, then floating payer receives the interest differential.
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