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Options Futures and Other Derivatives
Options Futures and Other Derivatives
FINANCIAL DERIVATIVES
A financial derivative is an
instrument whose value is derived
from the value of an underlying asset
(e.g. stock, foreign currency, bond, or
another derivative)
Forward Contracts
Futures Contracts
Options
Swaps
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market participants
sought higher YIELDS
without an adequate
appreciation of the
RISKS and failed to
exercise proper due
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Key Words
Subprime borrowers
Securitization
Collateralized Debt
Obligations (CDO)
Mortgage-Backed
Securities (MBS)
Securitization
Securitization is basically the
packaging of a pool of
assets,
e.g.
mortgages, into securities that
can be sold to investors
Mortgages are thus converted
to mortgage-backed
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FORWARD CONTRACT
A forward contract is an
agreement to buy (long position)
or sell (short position) an asset in
the future at an agreed price
(delivery price) today
The asset could be a stock, a
foreign currency, another financial
instrument (e.g. bond)
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5% fixed
B
6-m LIBOR
Currency Swap
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1997
1998
1999
2000
2001
2002
20031
Corporate
196
1,892
11,726
22,538
55,679
102,039
88,817
Bank
394
2,715
8,021
6,854
16,844
25,490
8,615
Sovereign
771
2,283
8,169
8,133
11,535
10,124
7,844
1,361
6,890
27,916
37,525
84,058
137,653
105,276
Total
865.3
519.8
92.2
147.0
83.3
96.9
Bank
589.1
195.4
(14.5)
145.8
51.3
(50.5)
Sovereign
196.1
257.8
(0.4)
41.8
(12.2)
48.2
406.2
305.2
34.4
124.0
63.8
52.9
Total
Source: CreditTrade
http://www.cnbc.com/id/38451750
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Greek Default
On March 9, 2012, The ISDA EMEA Determination
Committee resolved that a Restructuring Credit
Event has occurred after Greece pulled off a massive
restructuring of debt where a vast majority of private
sector lenders agreed to swap $77 billion in Greek
debt for new bonds worth as much as 75 percent less.
The DC also announced an auction with respect to the
settlement of standard CDS for which Greece is the
reference entity.
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Options
A call option is a
right to buy a
certain asset by a
certain date for a
certain price (the
strike price)
A put option is a
right to sell a certain
asset by a certain
date for a certain
price (the strike
price)
Case
Study
EXAMPLE OF DEBT
RESTRUCTURING
(Using options as sweeteners)
Series V
Series VI
Par value
Dividend
Series VII
Anniversary
Date
Voluntary and
mandatory
conversion
Convertible at the option of its holder, at anytime from the date of issue to
Anniversary Date into one PLDT Common Share. Unless previously converted into
PLDT Common Shares, shall be mandatorily converted into PLDT Common Shares
on the date immediately following the Anniversary Date (the Mandatory
Conversion). Holders may also convert such shares into PLDT Common Shares
within 10 calendar days from the date of receipt of notice from PLDT of the
occurrence of an event which would or is reasonably likely to result in PLDT
becoming insolvent (the Winding Up Conversion).
Put Option
www.bsp.gov.ph/banking/d
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www.bsp.gov.ph/banking/d
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www.bsp.gov.ph/banking/d
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Thank you.