Documente Academic
Documente Profesional
Documente Cultură
Introduction
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Introduction
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Introduction (cont’d)
Futures,
options and swap markets are very useful,
perhaps even essential, parts of the financial system
– hedging or risk management
– speculate or strive for enhanced returns
– price discovery - insight into future prices of commodities
Futures
and options markets, and more recently
swap markets have a long history of being
misunderstood -
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Introduction (cont’d)
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Introduction (cont’d)
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Objectives of the Course
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Derivatives & Risk
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Derivatives & Risk
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Types of Derivatives
Options
Futures contracts
Swaps
Hybrids
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Options
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Futures Contracts
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Futures Contracts
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Futures Contracts (cont’d)
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Futures Contracts (cont’d)
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Futures/Forward Contracts -
History
Forward contracts on agricultural products began in the
1840’s
– producer made agreements to sell a commodity to a buyer at a
price set today for delivery on a date following the harvest
– arrangements between individual producers and buyers -
contracts not traded
– by 1870’s these forward contracts had become standardized
(grade, quantity and time of delivery) and began to be traded
according to the rules established by the Chicago Board of
Trade (CBT)
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Futures/Forward Contracts -
History Cont’d
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Futures/Forward Contracts -
History Cont’d
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Option Contracts - History
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Options Contracts
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Swaps
Introduction
Interestrate swap
Foreign currency swap
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Introduction
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Swap Market - History
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Swap Market - History
– The second major event was the change in policy of the U.S.
Federal Reserve Board to target its money management
operations based on money supply vs the actual level of rates
U.S interest rates became much more volatile hence created interest rate
risk
With the prominence of U.S dollar fixed income instruments and dollar
denominated trade, this created interest rate or coupon risk for financial
managers around the world .
– The swap agreement is a ‘creature’ of the 80’s and emerged via the banking
community - again in response to the above noted need
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Interest Rate Swap
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Foreign Currency Swap
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Commodity Swap
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Product Characteristics
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Product Characteristics (cont’d)
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Product Characteristics (cont’d)
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Product Characteristics (cont’d)
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Participants in the Derivatives
World
Include those who use derivatives for:
– Hedging
– Speculation/investment
– Arbitrage
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Hedging
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Speculation
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Arbitrage
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Arbitrage (cont’d)
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Uses of Derivatives
Risk management
Income generation
Financial engineering
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Risk Management
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A Framework for Integrated Risk Management
Organization wide
Strategic
-technology & information/knowledge Risk
- business model
-industry value chain transformation
Regulatory Risk
Identification Impact Response
-environmental
Connectivity
-competition
Operating Risks
-distribution networks
-manufacturing
Commercial Risks
- new competitor (s)
- customer service expectations
- new pricing models
- supply chain management
….for a producer
…the consumer has the opposite view
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Income Generation
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Financial Engineering
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Financial Engineering (cont’d)
‘Financial Engineers’:
– Select from a wide array of puts, calls futures, and other
derivatives
– Know that derivatives are neutral products (neither
inherently risky nor safe)
.....’derivatives are something like electricity:
dangerous if mishandled, but bearing the
potential to do good’
Arthur Leavitt
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Effective Study of Derivatives
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Effective Study of Derivatives
(cont’d)
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