AE18 - Financial Markets

Derivatives
Market
Table of
Contents

1. Derivative Securities 2. Forwards and Futures

3. Options 4. Swaps

5. Caps, Floors, and Collars

 Derivative
01
Securities
 Derivative
01. Securities
An agreement between two parties
to exchange a standard quantity of an
asset at a predetermined price at a
specified date in the future.

Derivative Securities Markets

The markets in which derivative
securities trade.
 Forwards
02
and Futures
 Spot Markets
Spot Contract is an agreement to transact

02. Forwards involving the immediate exchange of assets and

and Futures
funds.

Forward Markets
Forward Contract is an agreement to transact
involving the future exchange of a set amount
of assets at a set price.

Futures Markets
Futures Contract is an agreement to transact
involving the future exchange of a set
amount of assets for a price that is settled
daily.
03 Options
03. Options
A contract that gives the holder the right, but not the obligation, to buy or sell the
underlying asset at a specified price within a specified period of time.

Call Option Put Option

An option that gives a purchaser the
right, but not the obligation, to buy the
underlying security from the writer of
the option at a prespecified exercise
price on or before a prespecified date.
An option that gives a purchaser the
right, but not the obligation, to sell the
underlying security to the writer of the
option at a prespecified price on or
before a prespecified date.
Option Values
Black-Scholes Model:
1. The spot price of the underlying
asset
2. The exercise price on the option
3. The option’s exercise date
4. Price volatility of the underlying
asset
5. The risk-free rate of interest
Option Markets
The Chicago Board of Options
Exchange (CBOE) opened in 1973.
It was the first exchange devoted
solely to the trading of stock
options.
04 Swaps

Swaps
04. An agreement between two
parties to exchange assets or
a series of cash flows for a
specific period of time at a
specified interval
Interest Rate Swap
An exchange of fixed interest payments for
floating-interest payments by two
counterparties.
Currency Swaps
A swap used to hedge against
exchange rate risk from mismatched
currencies on assets and liabilities.
Credit Swaps
Total Return Swap involves swapping an
obligation to pay interest at a specified fixed
or floating rate for payments representing the
total return on a loan of a specified amount.
Pure Credit Swap is the alternative swap,
without the interest rate.
 Caps, Floors,
05
and Collars
 05 Caps, Floors,
and Collars Floor
A put option on interest rates,
often with multiple exercise
dates.
Cap
A call option on interest rates,
often with multiple exercise Collar
dates. A position taken simultaneously
in a cap and a floor.
Thank You!
Chapter 10 - Derivative Securities Markets
Financial Markets and Institutions Fifth Edition
Anthony Saunders & Marcia Millon Cornett

Karol Elaine R. Bercero AE 18 - Financial Markets October 26, 2021