DERIVATIVES

Global contest: International financial system

Network wich cover the hole planet and wich is animated by actors some small ones
other big ones, the smaller (employer of a bank) , big one ( big international
institutions) special drawing rights, that might be more important< so the IMF could
probably became the most important financial institution.
The international financial system is flexible that can accept big event that can have
impact in all financial market and therefore in the global financial market.
When an event occurs, every actor tries to adapt to adapt to the new event, when
all of them try to do this, the hole system try to adapt to this.
Keynes:
Corporation produces wealth.
Corporate for finance their invest can finance by them self or get a loan ( finance
themselves with external funds)
.
International financial system
3 pillar: the three pillar are interconnected and the network is compose by the
arrows between the three pillars
-

Credit Market: the intermediarys banks and finances companies (specialized,

their activities are dedicated to individual, municipals or corp.)
Forex (currencies)
Capital Market *: divide in money market (dedicated to short term and
medium term funds/ interbank market IBM where intervene financial
institution/ in the other side we have the money market securities) and the
exchanges (stocks, bonds, mutual funds most of them long term) main
difference is the maturity of the instruments.
one year is the limit of short term and medium term; while the limit between
medium to long term is 5 year; the long term can go till 50 year.

Two exceptional market that are the insurances companies and the commodities
markets.

MMS: The names are different considering the issuer

TBILL: short term money market of the government (BTF French)
TNOTES: medium term notes (BTAN French)
T BONDS: long term bond (OAT French)
1yr
10 yr
t bill
T- Note
T-Bond
5y
BTF
BTAN
OAT
ISIN : International Security Identification Number

A corporation can go to the money market fund to issue short term debt if
they are not able to go to the long term market.
*
ST
MT

Corp
CP
MTN

fin
CD
MTN

gov
T Bill
T Notes

gov
BTF
BTAN

Inf
CDn
BMTn

Ent
BT
BMTn

BASICS OF DERIVATIVES MARKETS

DEF: Instruments which derived from the value of an asset, an underlying
asset
The first official market in derivatives was the CBOT, the main function was
transferring the risk (hedging). The only objective of the market in that times
was hedging, the people that used to interact in this market were the
producer and the merchants.
Gross market value, OTC market represent 50 thousand billions and
organized market 200.000 billion USD.
At the time the contract ends, the farmer used to deliver the asset, now the
market work in a different way , the producer instead of deliver to the buyer
now deliver the spot and rebuy the product in the future, rebalancing the loss
and the gains in that period.

Future and forward contract

Both are term contracts
FORWARD
OTC
Taylor made
Confidential
Default risk

FUTURE
EXCHANGE- TRADE
Standardize (anonymous)
Publicity
The risk assumes the clearing house
Flexibility/ Liquidity

Both contract permit to fix the term delivery price and quantity, the
differences between both, is that the future market have flexibility while the
forward is a binding commitment and wait the maturity of the contract.
OPTIONS
When the price is over the strike you exercise the option. Pay off ( when you
get some money of the fee of the option)

Anticipation
Speculation

Big rise
Buy call

hedging

Nothing

Small rise
Nothing to
gain or sell
call/put
Nothing sell a
call

Big fall
Buy a put

Buy a put

Small fall
Nothing to
gain or sell
call
Nothing

FUTURE CONTRACTS
Specification:
- Central clearing, core of the market.
- transparency
- unscreened prices
- knowledge of open interest (everyday of all the existing position at the end
of the day)
-many of those markets, we have market makers, liquidity is issue by market
makers
USER:
Speculation, Hedging, arbitrage, (change of nature of an asset)
Arbitrage strategies.
LONG- SHORT strategy.
Consist working in two corporation belonging in the same sector of activity.
Strategy that is decor related can make wins when the market is going down
or up. The idea is to look for securities that are similar. Bets in the move of
the spread of two securities.
Foto cel 1
CASH AND THE FUTURE strategy
The future is more volatile than the spot or cash asset.
*A future price tells you how much the future market anticipates the value of
the price of a security. Its more volatile than the cash price.
Convertible arbitrage. Issued with a duration of 3 to 5 year, systematically
pay back a par (100), at parity of the face value.
Photo 2
Convertible bond are not traded in percentage as they follow the equity as
other regular bonds. Guarantee investment, if the price of the action goes to
the contrary direction the holder does not converted and the holder stay with
his bond till the end recovering principal + coupon

Parachute effect of convertible bonds: when the share price collapse, the
convertible bond dont crash in the same matter, the bond falls less than the
action and has a protection network.
FIXED INCOME ARBITRAGE
Arbitrager of the yield curve.
Anticipation could be steeping or flattening of the yield curve.
Basis swap: exchange of two securities (short term securities and long term
security)
-Futures: future for ten years future vrs future of eurolibor (eurodolar)
..
FUTURES
CME; T BONDS, T NOTES, TBILLS, EURODLLLAR. S&p 500 index, dow jones
index, Nasdaq 100, Nikkei 225, eurFX
ICE> Eurodllar , euribors
EUREX: Dax 30, Dtoxx 50& NSCI index, Shatz,Bobl, Bund, FOAT , BONO , BTP
JAPAN (TSE): Nikke 225, JGB 10Y, TOPIX 400
BMF ; Real
Shenzen : FTSE China
Seoul :Kospi 200
Munbai: BSE SENSEX Index (world N1 for stock index)
Euronet> CAC40
LONDOn gives the temperature of money market interest rate market.
Libor in EUR is not the same as EURLIBOR
FUTURE MARKET FOR COMMODITIES
CBOT agriculturals
NYMEX crude oil , natural gas, electricity
COMEX gold, sil ver, cooper, patinum
ICE agricultural, brent, gazole , electricity
BMF, brown sugar
Singapore crude oil, gasoline. Fuel oil
Baltic exchange freight
LME metals
Open interest: number of contracts outstanding
Clsing out of position: reversing trade
Cash versus actual delivery: most traders clse out their position before,
maturity at maturity date most rradrs cancel teheir original position by a
reversing trade for a cash settlement the fraction of contracts that result in
actual delivery is between 1% and 3% depending of the underlying asset
Basis: difference between the future price and the spot price
Convergence property> the future price and the spot price must converge at
maturity

Basic risk: risk attributable to uncertain movements in the spread between

the futures price and the spot price (arbitrager)
Spread: taking a long position & a short positon on two different maturities on
the same underlying
Margin account by a broker
Margin requirements, initial margin (deposit in cash or collateral)
Maintenance margin (50% to 75% of the deposit)
Margin calle (triggered if maintenance margin is reached)
Daily settlements is made on a market to market basis
Either new funds must be transfer into the margin account or the broker will
close out enough of the traders position to meet the required margin for that
position.
CAC 40 INDEX FUTURE
The unit of trading is 10, the delivery day is the first business day after the
last trading day, the delivery month, is every 3 month, quarterly basis, 8 half
yearly maturities from june/December.

CASH
19TH
20 th
21th
24th
25th
26th

4501
4470
4420
4480
4250
4040
4010

FUTURE
DEC
4490
4450
4380
4460
4340
4090
4050

POSITION
BUY
MC -400e
MC -700e
CM +800e
MC 1200e
MC -2500e
DL -400e

LOSS 4490 4050 = 440 * 10 = 4.400 e