Professional Documents
Culture Documents
Class1 Jose Guedes 1
Class1 Jose Guedes 1
Class1 Jose Guedes 1
A derivative security is a security whose value derives from an underlying variable; Frequently the underlying variable is the price of a traded asset; this traded asset is referred to as the underlying security, the underlying asset or the primitive asset.
Financial derivatives
2004
Notional amounts Gross market value
2008
Notional amounts 80 26,8 0,2 1,1 44,3 0,1 8,1 9,1 4,8 0,03 0,5 1,34 0,5 520 272 22,8 52,3 36,7 9,2 43 11,1 5,3 0,04 0,7 1,1 1,1 0,7 Financial derivatives Gross market value
Exchange-Traded Instruments Interest rate futures Currency futures Equity index futures Interest rate options Currency options Equity index options OTC Instruments Interest rate swaps FRAs Options on interest rates (caps, loors, collars, swaptions...) Currency swaps, forwards & forex swaps Equity linked contracts Credit Default Swaps Jose Correia Guedes
47 18,2 0,1 0,6 24,6 0,06 3 248 147,4 12,8 27,2 23,4 4,4
1995 - Barings
Trading in Nikkei-index contracts in Singapore & Osaka exchanges resulted in losses of 1,4 billion USD, wiping out the banks capital
2006 - Amaranth
Losses in natural gas futures of up to 6 billion USD. Positions in futures taken over by JPMorgan, Merril Lynch & Citadel at undisclosed prices.
Financial derivatives
Forward Contracts
Contract that stipulates the obligation to buy (long position) or to sell (short position) a specific asset (underlying asset), at a specific future date, for a specific price; A forward is a zero-sum game: the value of the long position is always the symmetrical of the value of the short position; Generally, forward contracts trade in the over-the-counter market.
Jose Correia Guedes Master in Business - FCEE Financial derivatives
Financial derivatives
Example
On January 5th of 2006 a company purchases S1,000,000 @ 1,17 (USD/Euro) forward at 3 months, to Bank B; The company takes a long position in USD and the bank takes a short position in USD; At maturity date (5th of April of 2006), the spot exchange rate is equal to 0,95: - the company must pay to the bank (1/1,17)*1,000,000 = 854.701 Euros; - the bank must pay to the company (1/0,95)*1,000,000 = 1,052,632 Euros The settlement of position is in favour of the company: the bank pays to the company 197.931 Euros
Financial derivatives
Future Contracts
Contracts traded in Derivatives Exchanges (EUREX, Liffe, CBOE-CBOT, COMEX....); Standardized Contracts:
Characteristics of underlying asset; N of units of underlying assets per contract; Maturity dates.
Financial derivatives
Dow Jones STOXX 50 Futures (FSTX) and Dow Jones Euro STOXX 50 Futures (FESX)
Underlying Index: 50 shares, prices weighed for the respective capitalization (it includes the impact of technical accidents but it excludes the impact on the value of the shares from conversion of warrants and convertible debt); Quote Method: points of the index, with no decimals; Value of the contract: Points of index * 10 Euros; Expirations: the three nearest months in the cycle March, June, September and December; Liquidation at expiration date: financial liquidation on the basis of the price of reference at expiration, to pay in the first working day after the last day of negotiation; Price of reference at the expiration: Arithmetic mean of the values of the index between 11h50 and 12h00 CET of the last day of negotiation; Tick: 1 point of the index (corresponds to 10 Euros); Last negotiation days: 3rd Friday of the expiration month; Margin: 250 points of the index (2500 Euros) per contract;
Jose Correia Guedes Master in Business - FCEE Financial derivatives
10
CBOT - gold
Transaction Unit: 100 troy ounces; Tick size: $10 per contract; Daily maximum variation: $5000 per contract relative to priors day closing price; Expiration Months: current month, following two months, plus February, April, June, August, October and December; Last day of negotiation: the 4th day before the last working day of the expiration month; Types of underlying accepted for delivery: Fine gold in bars of 100 ounces "assaying not less than 995 fineness"; Way of delivery: vault receipt emitted by the receiver entity in New York or Chicago duly authorized by the CBOT. Initial margin per contract: $2,000; Minimum maintenance margin: 75% of the initial margin.
Jose Correia Guedes Master in Business - FCEE Financial derivatives
Clearing House - CH
The purchaser and the seller of a future contract do not need to know each other. Once a buy order is matched with a sell order (through either an electronic trading platform or a trading pit), the CH takes over as the counterpart of each of the two trading parties.
Financial derivatives
11
Investor A
(wants to buy n contracts)
Investor B
(wants to sell n contracts)
CH
Negotiation system
Order to buy n contracts
Jose Correia Guedes
The CH reduces the credit risk faced by investors trading future contracts:
The counterpart to all contracts is the CH; The CH has financial reserves (the capital of the members of the exchange) that guarantee the performance on its contracts;
Financial derivatives
12
Financial derivatives
Hypothetical adjustment of position during the first 6 days of the life of the contract
Day Future Price Cash-flow Balance-MA Additions-MA Withdrawals-MA
What happens if the investor, on January 13th, refuses to add funds to his margin account?
Jose Correia Guedes Master in Business - FCEE Financial derivatives
13
Open interest
Most investors close their positions in futures before the maturity dates of contracts.
- Why? - How?
The open interest" consists of the number of positions that are open (either the sum of all long positions or all short positions), at a particular date; What happens to "open interest" when an investor trades a new contract?
Jose Correia Guedes Master in Business - FCEE Financial derivatives
14
15