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lecture_8-_derivatives

lecture_8-_derivatives - MA826 8-Derivatives Derive their...

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MA826 8-Derivatives Derive their value from the value of underlying existing financial products. Have the potential to benefit from the movement of the price on these products. Derivatives trading Types traded in exchanges OTC Used to hedge and speculate Large in US
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We consider: Forward contracts Financial futures Options Swaps
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Over The Counter (OTC) market A market in which trades are arranged in any size between a bank and its customer or between two banks. In OTC market Deals are not subject to the regulation of an exchange Prices are negotiated between parties The terms are ‘customized’ to suit the needs of the parties.
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Forward Contract is an agreement to trade a specific asset at a fixed future date at a set price. E.g. an exporter may enter a forward contract to sell a foreign currency. is an agreement between two parties Forward buyers and sellers cover their positions. Can be used for speculation.
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Long and Short Positions “long position” : buying a forward contract in anticipation of an increase in value. If price of asset holder will gain “short position” : selling a forward contract in anticipation of a decrease in value.
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Futures Contract A futures contract is a standardized exchange tradable contract to buy or sell an asset at a future date at a specified price. The value of financial futures is based on the underlying financial instruments, not a physical commodity. Are traded in LIFFE* in the UK
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FUTURES CONTRACTS AGREEMENT DELIVERY TO BUY DATE TIME NOW TAKE DELIVERY
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AGREEMENT MAKE TO SELL DELIVERY TIME NOW DELIVERY DATE
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All futures are exchange-traded contracts and they're standardised in terms of: The delivery date the amount of the 'underlying' asset they relate to and the contract terms. Settlement could involve cash or physical delivery.
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Main Types of Futures Bond futures Short-term interest rate futures Stock index futures Currency futures A company can use futures to “ lock-in ” the value of assets or liabilities, or to guarantee the value of receipts and payments.
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Margins A “margin” is the amount required to be deposited with the clearing house by each party to a future’s contract. Margins guard against potential losses from adverse price movements. Daily “margin calls” are made to ensure that the clearing house’s credit risk is contained.
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Example Company A buys a bond future at £94,000 with settlement date in 3 months.
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