“International Finance and Payments” Lecture XII “Using of Derivatives in International Financing” Lect. Cristian PĂUN

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“International Finance and Payments” Lecture XII “Using of Derivatives in International Financing” Lect. Cristian PĂUN URL: Academy of Economic Studies Faculty of International Business and Economics

International Derivatives Market

Interest rate derivatives – International Market Derivative FRA’s6,7556,4237,7379,146 Swaps43,93648,76858,89768,274 Options9,3809,47610,93312,575 TOTAL60,09164,66877,56889,995

Currency derivatives – International Market Derivative Forward and futures9,59310,13411,17611,298 Swaps2,4443,1943,1023,350 Options2,3072,3382,4703,427 TOTAL14,34415,66616,74818,075

Equity derivatives Derivative Forward and swap Options1,5271,5551,5611,828 TOTAL1,8091,8911,8812,214 Real assets (goods) derivatives Instrument Gold Others Forward and swap Options TOTAL

Forward contract Long Short Profit Loss Spot Forward rate

Forward contracts and credit risk management PositionRiskPosition Creditor currency interest Short on forward contracts Debtor currency interest Long on forward contracts Forward contract characteristics: it is not a standardized contract forward price is negotiable forward contracts are settled only at the maturity there is not a secondary market you have no possibility to give the contract to another beneficiary.

Futures contracts Long futures Short futures Profit Loss Futures at the Settlement date Initial Futures

Credit Risk Management using Futures Contracts PositionRiskPosition Creditor currency interest Short on futures contracts Debtor currency interest Long on futures contracts

CALL Options Loss Profit Loss Long CALL Short CALL PE + Premium

Put Options Loss Profit Loss Long PUT Short PUT PE - Premium

Credit Risk Management using Options Contracts PositionRiskPosition Creditor currency interest Long PUT on options contracts Debtor currency interest Long CALL on options contracts Note: Short positions are not desirable for a proper credit risk management

Swap Contracts Bank A A Credit Bank B B Credit Swap Bank Swap contract LIBOR Fixed interest rate

Interest rate synthetic instruments / cap a. « cap »: Bank A ABank B Premium Cap LIBOR Credit i 1 = i 1 + premium – dif.i

Synthetic instruments / floor b. « floor »: A Bank ABank B Premium cap LIBOR Credit i 1 = i 1 - premium + dif.i

Synthetic instruments / collar c. « collar »: Bank A A Bank B LIBOR TBR Credit Bank C Premium Collar