復(fù)習(xí)下學(xué)期華僑學(xué)院

1、Chapter 14Financial DerivativesHedgingEngage in a financial transaction that reduces or eliminates riskLong positionShort positionHedging risk involves engaging in a financial transaction that offsets a long position by taking an additional short position, or offsets a short position by taking an ad

2、ditional long positionInterest-Rate Forward ContractsAgreements by two parties to engage in a financial transaction at a future (forward) point in timeSpecification of the actual debt instrument that will be delivered at a future dateAmount of the debt instrument to be deliveredPrice (interest rate)

3、 on the debt instrument when it is deliveredDate on which delivery will takes placePros and Cons of Forward ContractsCan be as flexible as the parties involved would likeDifficult to find a counterpartySubject to default riskFinancial Futures Contracts and MarketsSimilar to an interest-rate forward

4、contract but differs in ways that e some of the liquidity and default problemsAt the expiration date of a futures contract, the price of the contract converges to the price of the underlying asset to be deliveredHedging with Financial FuturesHolding $5M of 6s 2030March 2010 6s of 2030 are long term

5、bond to be delivered in the CBT futures contract expiring in one year: March 2011. Interest is expected to stay at 6% for the next year so the 6s of 2030 and the futures contract are selling at par.Need to offset the long position in the bond with a short positions (selling a futures contract).If in

6、terest rates increase over the next year to 8% Value on March 2011 8% interest rate $4,039,640Value on March 2010 6% interest rate-$5,000,000Loss -$ 960,360Hedging with Financial Futures (contd)Short position in the futures contracts has value of $4,039,640(the value of the $5M in bonds after the in

7、terest rate rises)but the buyer of the futures contract agreed to payyou $5M on the maturity date.Your gain is $960,360,this has been a successful hedge. Organization of Trading in Financial Futures MarketsOrganized exchangesRegulated by the Commodity Futures Trading Commission (CFTC)Ensure prices a

8、re not manipulatedRegisters and audits brokers, traders, and exchangesApproves proposed futures contracts to ensure they serve the public interestTrading has e internationalized and done 24 hours a dayTable 1 Widely Traded Financial Futures Contracts in The United StatesExplaining the Success of Fut

9、ures MarketsQuantities delivered and delivery dates are standardizedA futures contract can be tradedAny Treasury bond that matures in more than fifteen years and is not callable for fifteen years is eligible for deliveryLimits the possibility of cornering the marketExplaining the Success of Futures

10、Market (contd)Buyer and seller make the contract with a clearinghouseMargin requirement that is marked to market every dayMost futures contracts do not result in delivery of the underlying asset on the expiration dateReduces transaction costsOptions IContracts that give the purchaser the option (rig

11、ht) to buy or sell the underlying financial instrument at a specified price (exercise or strike price) within a specific period of time (term to expiration).The seller is obligated to buy or sell the financial instrument if the buyer of the option exercises the right to sell or buy.The buyer does no

12、t have to exercise the option.Options IIA premium is paid for the optionAmerican option can be exercised at any time up to the expiration dateEuropean options can only be exercised on the expiration dateStock optionsFutures optionsMore liquid than debt instrument marketsRegulated by the SEC (stocks)

13、 and the CFTC (futures)Options ContractsCall option gives the owner the right to buy a financial instrument at the exercise price within a specific period of timePut option gives the owner the right to sell a financial instrument at the exercise price within a specific period to timeFIGURE 1 Profits

14、 and Losses on Options Versus Futures ContractsDifferences Between Options and Futures ContractsFor a futures contract the profits grow by an equal dollar amount for every point increase in the price of the underlying financial instrumentFor the option contract profits do not always grow by the same

15、 amount for a given change in the price of the underlying financial instrument because of the protection afforded from lossesDifferences Between Options and Futures Contracts (contd)Initial investment on the contracts differMoney changes hands daily in the futures market; only once for the option co

16、ntract (when the option is exercised). Pricing Option PremiumsThe higher the strike price, everything else being equal, the lower the premium on call (buy) options and the higher the premium on put (sell) optionsThe greater the term to expiration, everything else being equal, the higher the premiums

17、 for both call and put optionsThe greater the volatility of prices of the underlying financial instrument, everything else being equal, the higher the premiums of both call and put optionsSwapsFinancial contracts that obligate each party to the contract to exchange a set of payments (not assets) it

18、owns for another set of payments owned by another partyCurrency swaps involve the exchange of a set of payments in one currency for a set of payments in another currencyInterest-rate swaps involve the exchange of one set of interest payments for another set of interest payments, all denominated in t

19、he same currencyInterest-Rate Swap ContractsInterest rate swap specifiesInterest rate on the payments that are being exchangedType of interest paymentsThe amount of notional principalThe time period over which the exchanges continueFIGURE 2 Interest-Rate Swap PaymentsAdvantages of Interest-Rate Swap

20、sLarge transactions costs from rearranging balance sheets are avoidedInformational advantages are maintainedPossible to hedge interest-rate risk over a very long horizonDisadvantages of Interest-Rate SwapsSwap markets suffer from a lack of liquiditySubject to default riskNeed for information about c

21、ounterparties has thus attracted intermediariesInvestment banksLarge commercial banksCredit DerivativesCredit optionsRight to receive profits tied either to the price of an underlying security or to an interest rateTies profits to changes in an interest rate such as a credit spreadCredit swapIncreases diversification and lowers overall riskCredit default swapCredit-linked notesCombination of a bond and a credit op