However, with derivatives trades, one party may have to pay another in the future. To facilitate these payments and to help manage credit risk, a derivatives clearinghouse typically interposes itself in the transaction, becoming the buyer to all sellers and the seller to all buyers. This substitution of one counterparty for another is known as novation.
Such trading is said to occur in the over-the-counter OTC 1. When trading occurs in person, it is valuable for a trader to be physically close to other traders. Traders make large investments to gain such speed advantages.
Introduction to Derivatives market. First, it can be easier to trade a large quantity directly with another party. A dealer could execute the entire trade as a single transaction, compared to the alternative of executing individual orders on a variety of different markets. Most of the trading volume numbers you see reported in the newspaper pertain to exchange-based trading.
Exchange activity is public and highly regulated. Over-the-counter trading is not easy to observe or measure and is generally less regulated. Financial institutions are rapidly evolving and consolidating, so any description of the industry is at best a snapshot. Familiar names have melded into single entities. The different measures count the number of transactions that occur daily trading volume , the number of positions that exist at the end of a day open interest , and the value market value and size notional value of these positions.
For example, on a stock exchange, trading volume refers to the number of shares traded. On an options exchange, trading volume refers to the number of options traded, but each option on an individual stock covers shares of stock. In an OTC trade, the dealer serves the economic function of a clearinghouse, effectively serving as counterparty to a large number of investors. Partly because of concerns about the fragility of a system where dealers also play the role of clearinghouses, the Dodd-Frank Act in required that, where feasible, derivatives transactions be cleared through designated clearinghouses.
When there are stock splits or mergers, individual stock options will sometimes cover a different number of shares. Notional value. Notional value measures the scale of a position, usually with reference to some underlying asset.
The concept of notional value is especially important in derivatives markets. Derivatives exchanges frequently report the notional value of contracts traded during a period of time. Open interest. Open interest measures the total number of contracts for which counter- parties have a future obligation to perform.
Each contract will have two counterparties. Open interest measures contracts, not counterparties. Open interest is an important statistic in derivatives markets. Typically they do so either by selling ownership claims on the company common stock or by borrowing money obtaining a bank loan or issuing a bond. Some exchanges, such as the NYSE, designate market-makers, who stand ready to buy or sell to meet customer demand.
In practice, most investors will not notice these distinctions. The bond market is similar in size to the stock market, but bonds generally trade through dealers rather than on an exchange. Most bonds also trade much less frequently than stocks. Table 1. To provide some perspective, the aggregate value of publicly traded common stock in the U.
By way of comparison, the gross domestic product GDP of the U. Market value changes with the price of the underlying shares. GDP, by contrast, represents output produced in the U. The market value and GDP numbers are therefore not directly comparable. The comparison is nonetheless frequently made. A given exchange may trade futures, options, or both.
The distinction between exchanges that trade physical stocks and bonds, as opposed to derivatives, has largely been due to regulation and custom, and is eroding. The introduction and use of derivatives in a market often coincides with an increase in price risk in that market. The market for natural gas has been deregulated gradually since , resulting in a volatile market and the introduction of futures in The deregulation of electricity began during the s. To illustrate the increase in variability since the early s, panels a — c in Figure 1.
The link between price variability and the development of derivatives markets is natural—there is no need to manage risk when there is no risk.
Investors who have the most tolerance for risk will bear more of it, and risk-bearing will be widely spread among investors. It is sometimes argued that the existence of derivatives markets can increase the price variability of the underlying asset or commodity.
However, the introduction of derivatives can also be a response to increased price variability. Change in 3-month T-bill rate 0. Louis Fed; c St. Interest rate year U. Treasury bond, year U. The point of this graph is that trading activity in futures contracts has grown enormously over this period. Derivatives exchanges in other countries have generally experienced similar growth. Eurex, the European electronic exchange, traded over 2 billion contracts in There are many other important derivatives exchanges, including the Chicago Board Options Exchange, the International Securities Exchange an electronic exchange headquartered in the U.
The OTC markets have also grown rapidly over this period. It is instructive to browse the websites of derivatives exchanges. For example, the CME Group open interest report for April reports positive open interest for 16 different interest rate futures contracts, 26 different equity index contracts, 15 metals, hundreds of different energy futures contracts, and over 40 currencies.
Many of these contracts exist to handle specialized requirements. Foreign Interest Credit Exchange Rate Equity Commodity Default Total — — — — — — Source: Bank of International Settlements. We routinely see headlines stating that the Dow Jones Industrial Average has gone up points, the dollar has fallen against the euro, and interest rates have risen.
But why do we care about these things? Their income pays for their mortgage, transportation, food, clothing, and medical care. Here are a few:. The Averages invest their savings in mutual funds that own stocks and bonds from companies around the world.
Introduction to Derivatives way is low. As a result, the Averages are not heavily exposed to any one company. The Averages live in an area susceptible to tornadoes and insure their home. The local insurance company reinsures tornado risk in global markets, effectively pooling Anytown tornado risk with Japan earthquake risk and Florida hurricane risk.
This pooling makes insurance available at lower rates and protects the Anytown insurance company. The bank in turn sold the mortgage to other investors, freeing itself from interest rate and default risk associated with the mortgage.
Because the risks of their mortgage is borne by those willing to pay the highest price for it, the Averages get the lowest possible mortgage rate. XYZ Co. In addition to having property and casualty insurance for its buildings, it uses global derivatives markets to protect itself against adverse currency, interest rate, and commodity price changes.
By being able to manage these risks, XYZ is less likely to go into bankruptcy, and the Averages are less likely to become unemployed. A bank that sells a mortgage does not have to bear the risk of the mortgage.
A single insurance company does not bear the entire risk of a regional disaster. Risk-Sharing Risk is an inevitable part of our lives and all economic activity. Drought and pestilence destroy agriculture every year in some part of the world. Some economies boom as others falter. Given that risk exists, it is natural to have arrangements where the lucky share with the unlucky. There are both formal and informal risk-sharing arrangements.
On the formal level, the insurance market is a way to share risk. Total collected premiums are then available to help those whose houses burn down. The lucky, meanwhile, did not need insurance and have lost their premium.
This market makes it possible for the lucky to help the unlucky. On the informal level, risk-sharing also occurs in families and communities, where those encountering misfortune are helped by others. There is one important risk that the Averages cannot easily avoid. This could be an important reason for the Averages to avoid investing in XYZ.
If the dollar becomes expensive relative to the yen, some companies are helped and others are hurt. It makes sense for there to be a mechanism enabling companies to exchange this risk, so that the lucky can, in effect, help the unlucky.
Fully aligned with the current Second Edition of Technical Analysis, this workbook-style book includes chapter learning objectives, chapter summaries, reviews of key terms and concepts, chapter questions, problems, solutions for all of the problems in the main text, additional questions and activities, multiple choice questions, student self quizzes, and more. It covers the full spectrum of issues, including tested sentiment, momentum indicators, seasonal affects, flow of funds, testing systems, risk mitigation strategies, and new advances in market analysis, portfolio selection, and systems management, and more.
However, this text simplifies the language for a less mathematically sophisticated audience. Omitting calculus completely, the book is suitable for any graduate or undergraduate course in business, economics, and other faculties. The Ninth Edition has a flexible structure that can be used for any course length. Instructors can choose to cover only the first 12 chapters, finishing with binomial trees, or to cover chapters in a variety of different sequences.
Each chapter from 18 onwards can be taught independently as its own unit. No matter how you elect to divide the material, Fundamentals of Futures and Options Markets offers a wide audience a sound and easy-to-grasp introduction into financial mathematics.
Financial Derivatives Author : Robert W. Through in-depthinsights gleaned from years of financial experience, Robert Kolband James Overdahl clearly explain what derivatives are and how youcan prudently use them within the context of your underlyingbusiness activities. Come on! Save my name, email, and website in this browser for the next time I comment.
Skip to content Post last modified: 16 April Reading time: 6 mins read. Download PDF. Sharing is caring More. What is Retailing? Leave a Reply Cancel reply Comment. Enter your name or username to comment. Enter your email address to comment. However, the stock pri c e at ex pirati on can b e v e r y l ar geandhasnobound,andasourloss grows linearl y in t he ter mi nal st ock price, ther e is no li mi t t o our loss.
Consequently,theonlythin g w e lose when ever the te rminal stock p rice islargerthan thestrikeisthefuturev alue of the p remi um we paid ini ti all y to bu y theoption.
Wewill profitfromadeclinein the stock prices. Howeve r, stock prices cannotbesmallerthanzero, soourmaximum gain is restricted to strike pric e l ess the futurevalueofthepremium,andit occurs at a termi nal st ock price of z ero. The bu ye r of the put opti on decides whether t o ex ercise o r not, and h e will onl y ex ercise if h e makes a profit.
As wehavetheoppositeside,wewillnever mak e an y mone y at the ex pirati on of the put option. Ourprofitisrestrictedtothe futur e value of th e p remi um, and w e mak e th is maximumprofit wheneverthestockpriceat ex pirati on is greate r than the strike price.
However,welose moneywheneverthe st ock price is smaller tha n the strike ; hence,thelargestlossoccurs whenthe stock pric e att a ins it s smallest possi ble value, z ero. W e lose the st rike price b ec ause somebodysellsusanassetforthe strike th at is w orth nothi ng.
W e ar e onl y compensatedby thefuturevalueofthepr emi um we rec eived. W e can now graph th e p a yo ff and p rofit dia gram s for the call opti ons. Th e pa yoff di a gram looks as follows:. W e get the p rofit dia gra m b y dedu cti ng the opti on premi a from the p a yoff gr aphs. The p rofit diagr am l ooks as follows :.
How ever, ther e are some inst ances in which the strike opti on pa ys o ff and the 45 -strike op ti on does not. S im il arly, th ere a re some inst ances in which the 35 -strike opti on pa ys o ff bu t neit her the 40 -strike nor the 45 -s trikepay off.
Therefore,thestrike offe rs more potential than the 40 - and 45 -strike,andthe40strikeoffersmore potential than the strike. W e pa y fo r theseadditionalpayoff possibilitiesby ini ti all y p a yin g a high er pr emi um.
W e get the p rofit dia gra m b y dedu cti ng the opti on premi a from the p a yoff graphs. Th e profit diagr am l ooks as follows :. Intui ti vel y, when ever the 35 -strike put opti on pa ys off i.
0コメント