Exam FM: Financial Economics Material Rick Gorvett, FCAS, ASA, CERA, MAAA, ARM, FRM, PhD Director, Actuarial Science Program State Farm Companies Foundation.

Slides:

Advertisements

Similar presentations

Copyright© 2003 John Wiley and Sons, Inc. Power Point Slides for: Financial Institutions, Markets, and Money, 8 th Edition Authors: Kidwell, Blackwell,

Advertisements

BY UCHE UWALEKE PhD. Understand key financial instruments Learn how derivatives could be used as Hedging instruments Be familiar with the main requirements.

What are CFD’s In finance, a contract for difference (CFD) is a contract between two parties, typically described as "buyer" and "seller", stipulating.

Copyright© 2006 John Wiley & Sons, Inc.1 Power Point Slides for: Financial Institutions, Markets, and Money, 9 th Edition Authors: Kidwell, Blackwell,

McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. Identify the most important features of stock  A Form of Equity.

Orion Karl Daley August – 2009

Derivatives Workshop Actuarial Society October 30, 2007.

Derivatives  A derivative is a product with value derived from an underlying asset.  Ask price – Market-maker asks for the high price  Bid price –

Hedging Foreign Exchange Exposures. Hedging Strategies Recall that most firms (except for those involved in currency-trading) would prefer to hedge their.

Bonds Add in bond interest ex from book. Bonds Unit 7 - Investing.

Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Chapter 21 Commodity and Financial Futures.

An Introduction to the Market Price of Interest Rate Risk Kevin C. Ahlgrim, ASA, MAAA, PhD Illinois State University Actuarial Science & Financial Mathematics.

Vicentiu Covrig 1 Options Options (Chapter 18 Hirschey and Nofsinger)

Spot and Forward Rates, Currency Swaps, Futures and Options

Risk Management in Financial Institutions (II) 1 Risk Management in Financial Institutions (II): Hedging with Financial Derivatives Forwards Futures Options.

7.6 Stocks Calculate the cost of stock purchases

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill /Irwin Chapter Ten Derivative Securities Markets.

 The McGraw-Hill Companies, Inc., 1999 INVESTMENTS Fourth Edition Bodie Kane Marcus 3-1 Irwin/McGraw-Hill How Securities are Traded Chapter 3.

Personal Finance FIN 235 Investing In Stocks & Bonds Chapter 14.

1 Investments: Prices and Great Investors Business Administration 365 Professor Scott Hoover.

How Securities are Traded How firms issue securities How securities are traded Trading basics Trading cost Order type Buying on margin Short sales.

Short Selling Objective: You’re bearish on a stock --- you think its price will be lower in the future. You want to Sell high now, and in the future Buy.

Vicentiu Covrig 1 Securities Markets. Vicentiu Covrig 2 The Role of Financial Markets Money markets: debt type securities with maturity up to one year.

FIN352 Vicentiu Covrig 1 How Securities are Traded (chapter 5)

Intensive Actuarial Training for Bulgaria January 2007 Lecture 15 – Principles and Types of Investment By Michael Sze, PhD, FSA, CFA.

Learning Objectives Explain the role of brokerage firms and stockbrokers. Explain how shares in public companies are “traded” Know different types of buy.

S LIDE 1.1 The Language of Financial Markets Quiz Bowl Game Board Invest in This Potent Investments Index or Exchange Earn It Who am I? Financial Markets.

Chapter 1 Introduction to Derivatives. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-2 What Is a Derivative? Definition  An agreement.

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Securities Markets CHAPTER 3.

McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 How Securities Are Traded.

Chapter 1 Introduction to Derivatives. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-2 What Is a Derivative? Definition  An agreement.

Copyright© 2006 John Wiley & Sons, Inc.1 Power Point Slides for: Financial Institutions, Markets, and Money, 9 th Edition Authors: Kidwell, Blackwell,

Basic derivatives  Derivatives are products with value derived from underlying assets  Ask price- Market maker asks for this price, so you can buy here.

FAMILY ECONOMICS & FINANCIAL EDUCATION © Family Economics & Financial Education – Revised November 2004 – Investing Unit – Language of the Stock Market.

INVESTMENTS | BODIE, KANE, MARCUS Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin CHAPTER 19 Futures Markets.

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 3-1 How Securities Are Traded Chapter 3.

Chapter 3 How Securities are Traded. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Primary vs. Secondary Security Sales.

Additional Topics Additional items to address: Holding Period Return Short Selling with Margin Requirements.

Currency Futures Introduction and Example. 2 Financial instruments Future contracts: –Contract agreement providing for the future exchange of a particular.

“A derivative is a financial instrument that is derived from some other asset, index, event, value or condition (known as the underlying asset)”

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 1 Chapter 3.

Mechanics of Options Markets Chapter 8 1 Options, Futures, and Other Derivatives, 7th Edition, Copyright © John C. Hull 2008.

DER I VAT I VES WEEK 7. Financial Markets  Spot/Cash Markets  Equity Market (Stock Exchanges)  Bill and Bond Markets  Foreign Exchange  Derivative.

International Finance FINA 5331 Lecture 1: The Foreign Exchange Market: Please read Chapter 5 Aaron Smallwood Ph.D.

1-1 Faculty of Business and Economics University of Hong Kong Dr. Huiyan Qiu MFIN6003 Derivative Securities Lecture Note One.

Additional Topics Additional items to address: Holding Period Return Short Selling with Margin Requirements.

Computational Finance Lecture 1 Products and Markets.

Risk Management and Hedging. Risk Management - Hedging “Hedge”: Take a position that offsets a risk “Risk”: Uncertainty regarding the value of the underlying.

1 Chapter 5 Secondary Market Making. 2 A.Secondary Market Making – Dealer/Broker Activity 1. Give financial claims greater liquidity  Investors  Issuers.

Methods of Buying an Asset. How to Buy a Share of Stock Outright purchase –Pay S 0 at t = 0; receive stock at t = 0 Borrow to pay for stock –Pay S 0 e.

Jacoby, Stangeland and Wajeeh, Forward and Futures Contracts Both forward and futures contracts lock in a price today for the purchase or sale of.

Forward and Futures Contracts. Forward Contracts Forward: obligation to buy/sell an underlying asset at a pre-specified expiration time and exercise price.

Chapter 3 How Securities are Traded. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Primary vs. Secondary Security Sales.

© 2013 Pearson Education, Inc., publishing as Prentice Hall. All rights reserved.2-1 The Uses of Derivatives Uses –Risk management. Derivatives are a tool.

Investments, 8 th edition Bodie, Kane and Marcus Slides by Susan Hine McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights.

CHAPTER 22 Investments Futures Markets Slides by Richard D. Johnson Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin.

Math in Our World Section 8.6 Stocks and Bonds.

 The more you use these ratios and the more you practice using them the easier it will be to remember the calculations, apply them in your exam and.

Capital Markets Course 10. X. Trading on the exchange market Exchange market trades = all buying or selling contracts for securities or other assets on.

Introduction The Nature of Derivatives A derivative is an instrument whose value depends on the values of other more basic underlying variables. Or A.

Chapter 1 Introduction to Derivatives. © 2013 Pearson Education, Inc., publishing as Prentice Hall. All rights reserved.1-2 What Is a Derivative? Definition.

Financial Statement Analysis

Derivative Markets and Instruments

Analysis and Interpretation of Financial Statements

Exam FM/2 Review Forwards, futures, & swaps

Investing Econ 10/18.

Introduction to Financial Risk Management

FIN 440: International Finance

Introduction to Short Selling

Introduction to Derivatives

Presentation transcript:

Exam FM: Financial Economics Material Rick Gorvett, FCAS, ASA, CERA, MAAA, ARM, FRM, PhD Director, Actuarial Science Program State Farm Companies Foundation Scholar in Act. Sci. University of Illinois at Urbana-Champaign

Agenda - Topics Basic derivatives concepts Forward and futures contracts Option contracts Option combinations and positions Risk management and hedging Methods of buying an asset Swap contracts

Basic Derivatives Concepts

Basics of Derivatives Derivative: value depends upon, or derives from, the value of something else Reasons for using derivatives –Risk management –Reducing transactions costs –Taxes, regulations, accounting –Speculation Perspectives –End users –Market makers –Economic observers

Transactions Costs Commissions –Percentage and / or flat amount –For buying assets: add to cost –For selling assets: subtract from proceeds Bid-ask spread –Bid = price broker bids to buy asset Investor sells at bid price –Ask = price broker asks to sell asset Investor buys at ask price Round-trip cost –Total cost associated with buying and then selling

Example of Round-Trip Cost You buy 1,000 shares of a stock, and immediately turn around and sell them. –Ask price = –Bid price = –Commission is $20, plus 1% of the proceeds of any buy or sell transaction. Find the round-trip transaction cost

Short-Selling Process: –Borrow asset and sell –Buy back and return asset later Issues: –Lease rate: payment required by lender from borrower (e.g., dividends  reimburse lender) –Haircut: additional margin required by lender –Short rebate / repo rate: interest rate on haircut Cost of short-selling includes difference between this rate and the market rate you would otherwise earn

Example of Short-Selling One-year short sale of 100 shares of stock –Price per share at t = 0 is $70 –Price per share at t = 1 is $65 –Additional collateral (haircut) required is $1,000 –Effective market interest rate is 5% –Rate (short rebate) credited to collateral is 3% –Dividend of $1.50 per share paid at t = 0.5 –Commission of $40 per transaction (on both ends) Find the short-seller’s profit.

Q: Reasons for Using Derivatives (From Exam FM Fin Econ Sample Questions)