Upload
mihaela-tonita
View
226
Download
0
Embed Size (px)
Citation preview
8/13/2019 079_Derivative Markets and Instruments
1/16
Derivative markets and
instruments
8/13/2019 079_Derivative Markets and Instruments
2/16
The Nature of Derivatives
A derivative is an instrument whose value depends(is derived) on the values of other more basicunderlying variables (usually a stock, bond orcommodity price).
Derivatives are created and traded on two distincttypes of markets:
derivatives exchanges (organized tradingfacilities)over-the-counter markets (OTC)
8/13/2019 079_Derivative Markets and Instruments
3/16
The OTC markets
The over-the counter market is animportant alternative to exchanges
It is a telephone and computer-linkednetwork of dealers who do not physicallymeet
Trades are usually between financialinstitutions, corporate treasurers, and fundmanagers
8/13/2019 079_Derivative Markets and Instruments
4/16
Comparison Between exchangetraded and OTC traded derivatives
Exchange traded
standardized instruments
trade in accordance withrules and regulations of theexchange and are usually
subject to governmentalregulation
guaranteed by the exchangeagainst loss resulting fromthe default of one of the
parties
OTC traded
created by any two partiesoff of an exchange
the parties set their ownterms and conditions
each party assumes thecredit risk of the other party
8/13/2019 079_Derivative Markets and Instruments
5/16
Classification of Derivatives
Derivatives
Forward commitments Contingent claims (Options)
Futures contracts(Exchange-traded)
Forward contracts(OTC traded)
Swaps(OTC traded)
Exchange-traded OTC traded
8/13/2019 079_Derivative Markets and Instruments
6/16
8/13/2019 079_Derivative Markets and Instruments
7/16
The size of derivative markets
Measured by two indicators:
Market value= the economic worth of thederivative
Notional Principal= the amount of theunderlying on which the derivative is based
8/13/2019 079_Derivative Markets and Instruments
8/16
Purposes of derivative markets
provide price discovery
facilitate risk management
make markets more efficient
lower transaction costs
Critics to derivatives:
excessively dangerous for unknowledgeableinvestors
linked to gambling.
8/13/2019 079_Derivative Markets and Instruments
9/16
Terminology
BULL MARKETA bull market is a market in which prices are rising. When
someone is referred to as being bullish, that person hasan optimistic outlook that prices will be rising.
8/13/2019 079_Derivative Markets and Instruments
10/16
Terminology (Cont.)
BEAR MARKET
A bear market is one in which prices are falling. Therefore, abearish view is pessimistic, and that person would believe
that prices are heading downward
8/13/2019 079_Derivative Markets and Instruments
11/16
Terminology (Cont.)
SPOT MARKET
=A commodities or securities market in which goodsare sold for cash and delivered immediately.
Contracts bought and sold on these markets areimmediately effective.
=The spot market is also called the "cash market" or
"physical market", because prices are settled incash on the spot at current market prices, asopposed to forward prices.
8/13/2019 079_Derivative Markets and Instruments
12/16
Terminology (Cont.)
GOING LONGThe party who owns an asset has what is termed a long
position.
Someone who is long in the market expects prices to rise.They expect to make money by later selling the contractsat a higher price than they originally paid for them.
Long position investment philosophy :
BUY LOW, SELL HIGH
8/13/2019 079_Derivative Markets and Instruments
13/16
Terminology (Cont.)
GOING SHORTThe party who owes an asset has what is termed a short
position
The short seller believes that prices are heading downward,so he sells contracts that he thinks will be less valuablesometime in the future.
Short position philosophy :
SELL HIGH, BUY LOW
8/13/2019 079_Derivative Markets and Instruments
14/16
8/13/2019 079_Derivative Markets and Instruments
15/16
DerivativesBasic notions
Derivatives are investments that derive their valuefrom some underlying quantity (usually a stock,bond or commodity price) Forward contractobligates the buyer to purchase the
underlying security on a given date for a specified priceArrangements between private partiesNot actively traded in any market
Futures contractobligates the buyer to purchase aspecified quantity of the underlying security on a given
date at a specified priceActively traded on futures exchanges until delivery dateCan earn gains/losses from simply trading the contract itself,
without every taking delivery of underlying goods
8/13/2019 079_Derivative Markets and Instruments
16/16
DerivativesBasic notions (cont.)
Optionagreement between an option writer(who sells the option) and buyer
Option buyer has right (but not obligation) to buy
(call) or sell (put) underlying security at the pre-determined exercise price on a specified date
If option is exercised, option writer must followthrough
Many options expire unexercisedOptions actively traded at options exchanges and
OTC markets