INMAR 100

Part II.
Derivatives
PRESENTED BY: GROUP 4 & 5
Expected Learning
Outcomes:
A Describe what derivative financial
instruments are

B
Distinguish between derivatives for hedging &
for speculation

C
Explain the nature of: future & forward
contracts, options, and interest rate swaps
 JOICE

Introduction
Derivative Financial
Instruments
These are financial instruments/contracts with
the value derived from an underlying asset. A
derivative is set between two or more parties.

They are complex financial instruments that

are used for various purposes.

JOICE
Illustration
Value of an
Value of a
Underlying
Derivative
Asset

What can be considered as an asset?

stocks market index

interest rates commodities
bonds
JOICE
Situational Example:

the year is 2021

JOICE
Situational Example:

John owns a Harry manufactures

bicycle factory. steel.
JOICE
Situational Example:
need

John needs 5T of Harry can provide the

steel in 2022. 5T of steel in 2022.
JOICE
Situational Example:

Harry promised to sell 5T of steel to John at $3000 in

2022 and John promised to buy from Harry with the same
condition.
JOICE
Situational Example:

With that, the two entered into a contract with the 5 tons of
steel as the underlying asset and set a certain price on a
predetermined date in future.
JOICE
Situational Example:
But, why didn't just John buy
5T of steel in 2022?

TO MANAGE RISK

John
JOICE
Situational Example:
2022
750

500

250

John 0 Harry
JAN FEB MAR APR MAY
JOICE
Situational Example:
2022
750

500

250

Harry 0
JAN FEB MAR APR MAY John
JOICE
Situational Example:

derivative
JOICE
Characteristics
1. Leverage or gearing is a property of derivatives.
One can trade large volumes for a tiny initial
investment (a small portion of the total contract
value).

ANGGE
Characteristics
2. Pricing and trading in derivatives are
complicated, and before one can start dealing in
these goods, they must have a thorough
understanding of the price behavior and product
structure of the underlying.

ANGGE
Characteristics
3. In and of themselves, derivatives are
worthless. They get their value from the
underlying instruments.

ANGGE
How It Works
Investors may buy derivatives in order to reduce
the amount of volatility in their porfolios.

ALEXA
 FOR

HEDGING SPECULATION
Protect againts cost Opportunity to gain profit
fluctuation by fixing a
price for a future deal in
advance.

ALEXA
Typical Examples
of Derivatives
Forward Contracts
Future Contracts
Options
Swaps

ALEXA
Forward
Contracts
Over-the-Counter
Customized
Less Liquid
At the end of the period

ALEXA
Futures
Contracts
Traded on Organized Exchange
Standardized
More Liquid
Follows daily settlement

ALEXA
Options
It is a contract or an agreement between two
parties allowing the recipient the right, but not the
obligation to transact a known transaction (buy or
sell) of a known asset at a known price in a known
pre-defined time frame.

JOICE
For instance:

It is January 1,
2020.

JOICE
 For instance:

Bill is her friend.

Zoe owns a car. JOICE

 For instance:

Bill requests to buy Zoe's

car for $15,000 anytime
for the month of February.
JOICE
 For instance:

Bill requests to Zoe agrees in

exchange for a 2%
buy Zoe's car for
value of her car.
$15,000.
JOICE
 For instance:

Bill agrees and

paid Zoe $300.

The two entered in an agreement.

JOICE
For instance:

saved for Bill

JOICE
Call Option

The contract
comes to an
end.

JOICE
Regulation of Future
and Options Markets

Futures and options markets are subject to many

of the same regulations as futures markets. Some
specific regulations that may be applicable to
futures and options markets include:

LALAINE
Regulation of Future
and Options Markets
1. Margin requirements
2. Position limits:
3. Reporting requirements:
4. Anti-manipulation measures:
5. Supervision and oversight:

LALAINE
What is
Swaps and Swap
Trading?

How does Swap

Trading Works?

ERICA
 Types of Swaps
Interest Rate Swaps
Commodity Swaps
Currency Swaps
Debt-Equity Swaps
Total Return Swaps
Credit Default Swaps (CDS)

ERICA
Illustrative Cases on
Derivatives

In order to understand derivatives, let us

take a look at a few examples:

ANGGE
Forward Contract vs
Call Option
Call options and forward contracts are two
different financial products that let two parties buy
or sell assets at predetermined prices on future
dates. To hedge assets or make predictions about
asset prices in the future, one can use forward
contracts and call options.

ANGGE
Forward Contract vs
Call Option
The right to purchase an asset at a certain price on
or before a specified date is provided by a call
option, but not the duty to do so.
An asset purchase or sale commitment is referred
to as a forward contract.

ANGGE
Forward Contract vs
Call Option
The main distinction between a call option and a
forward contract is that the latter is legally binding.
Furthermore, forwards offer a great deal of
flexibility in terms of schedule and cost.

ANGGE
 Call Choice

In the case of an American call option, a call gives the

buyer the right, but not the duty, to purchase an asset
at a certain price on or before a predetermined date.
If the buyer exercises their option or if the option
expires in the money, the seller or writer of the call
option is required to sell the buyer shares.

ANGGE
 Advance Contract

Forward contracts, as opposed to call options, are legally

binding agreements between two parties to purchase or
sell an asset at a given price on a particular date. Forwards
are traded over-the-counter rather than on a centralized
exchange (OTC). Retail investors don't frequently utilize or
have access to these instruments. Additionally, forwards
differ from futures.
ANGGE
 Example 3:
Put Option
A contract giving the option buyer the right, but
not the obligation, to sell-or sell short a specified
amount of an underlying security at a
predetermined price within a specified time frame.

LALAINE
 Trendline

How is derivatives industry responding to COVID-19?

ERICA
 Internationalization
of Financial Markets
Finacial Markets Around the world
The New York Stock Exchange (NYSE)- $14.14 trillion
market capitalization
The Toronto Stock Exchange (TSE)- $1.45 trillion
market capitalization
The Japan Exchange Group (JPX)- $3.73 trillion
market capitalization
 Internationalization
of Financial Markets
Finacial Markets Around the world
Shanghai Stock Exchange ( SSE)- $2.9 trillion market
capitalization
Shenzhen Stock Exchange (SZSE)- $2.36 market
capitalization
Stock Exchange of Hong Kong- $3.32 market
capitalization
World Stock Markets

Size of the Markets

Cross-Border Measure
 International Bond

market, Eurobonds,

And Eurocurrencies
Foreign Bonds- traditional

instruments in the

international bond market

Factors affecting the long-run

trends of increased financial

market activity
LOWER INFLATION
PENSIONS
STOCK AND BOND MARKET PERFORMANCE
RISK MANAGEMENT
THE INVESTORS
 The Investors
The Categories of Investors
•Individuals
•Institutional ainvestors
Types of Institutional Investors
•Mutual Funds
•Hedge Funds
•Insurance Companies
 International Money and Capital

Markets
International Credit Markets
Three major types of international credit market
•Eurocredits
• Eurobond Market
•Foreign Bond Market
Thank you for
listening!
FINMAR 100