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

Slides:



Advertisements
Similar presentations
Insurance, Collars, and Other Strategies
Advertisements

Derivatives Workshop Actuarial Society October 30, 2007.
Options, Forwards, Bonds and No-Arbitrage Futures
Derivatives  A derivative is a product with value derived from an underlying asset.  Ask price – Market-maker asks for the high price  Bid price –
An Overview of the Financial System chapter 2. Function of Financial Markets Lenders-Savers (+) Households Firms Government Foreigners Financial Markets.
1 Outline Definition Types of derivatives Participants in the derivatives world Uses of derivatives.
GBUS502 Vicentiu Covrig 1 Financial Markets and Institutions (chapter 2)
Investments: Course Introduction 01/05/ Review: Basic Concepts of Finance Time Value of Money Risk and Return.
Chapter 2 An Overview of the Financial System © 2005 Pearson Education Canada Inc.
An Overview of Financial Markets and Institutions
FIN303 Vicentiu Covrig 1 Financial Markets and Institutions (chapter 5)
Chapter 2 An Overview of the Financial System. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 2-2 Function of Financial Markets Perform.
Chapter 13 Financial Derivatives. © 2004 Pearson Addison-Wesley. All rights reserved 13-2 Hedging Hedge: engage in a financial transaction that reduces.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill /Irwin Chapter Ten Derivative Securities Markets.
International Financial Markets
Exam FM: Financial Economics Material Rick Gorvett, FCAS, ASA, CERA, MAAA, ARM, FRM, PhD Director, Actuarial Science Program State Farm Companies Foundation.
Risk and Derivatives Stephen Figlewski
Copyright © 2000 Addison Wesley Longman Slide #2-1 Chapter Two AN OVERVIEW OF THE FINANCIAL SYSTEM.
© 2004 Pearson Addison-Wesley. All rights reserved 2-1 Function of Financial Markets 1. Allows transfers of funds from person or business without investment.
International Financial Markets Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall.
International Financial Markets Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 9.
Copyright ©2004 Pearson Education, Inc. All rights reserved. Chapter 15 Investing in Stocks.
Management of Financial Institution. Financial Environment.
Business in Action 7e Bovée/Thill. Financial Markets and Investment Strategies Chapter 19.
The International Financial System
Chapter 1 Introduction Options, Futures, and Other Derivatives, 8th Edition, Copyright © John C. Hull 2012.
Understanding Financial Management and Securities Markets
Securities and Commodities Traders New Words and Definitions Copyright Texas Education Agency (TEA)
Chapter 1 Introduction to Derivatives. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-2 What Is a Derivative? Definition  An agreement.
© 2004 Pearson Addison-Wesley. All rights reserved 2-1 Function of Financial Markets 1. Allows transfers of funds from person or business without investment.
4-1 CHAPTER 2 The Financial Environment: Outlines Financial Markets Financial Institutions.
Chapter 1 Introduction Options, Futures, and Other Derivatives, 8th Edition, Copyright © John C. Hull
Exchange Market as a Part of International Financial Markets, Participants and Functions of Exchange Market Matúš Czakó Ján Lajda.
Basic derivatives  Derivatives are products with value derived from underlying assets  Ask price- Market maker asks for this price, so you can buy here.
Derivatives. What is Derivatives? Derivatives are financial instruments that derive their value from the underlying assets(assets it represents) Assets.
Financial Instruments, Financial Markets, and Financial Institutions
McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 Financial Instruments, Financial Markets, and Financial.
1 Futures Chapter 18 Jones, Investments: Analysis and Management.
Chapter 14 Financial Derivatives. © 2013 Pearson Education, Inc. All rights reserved.14-2 Hedging Engage in a financial transaction that reduces or eliminates.
Chapter 2: The Financial System 1. Evil and Brilliant Financiers? Financiers are not innately good or evil but rather, like other people, can be either,
Dr Marek Porzycki Chair for Economic Policy.  Markets in which funds are chanelled from savers/investors (people who have available funds but no productive.
Finance Chapter 4 The financial environment: markets, institutions, & interest rates.
© 2004 Pearson Addison-Wesley. All rights reserved 13-1 Hedging Hedge: engage in a financial transaction that reduces or eliminates risk Basic hedging.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved. Chapter 14 Financial Derivatives.
Chapter 29 – Applications of Futures and Options BA 543 Financial Markets and Institutions.
Investment Vocabulary. Stock Market  A market in which the public trades stock that someone already owns; the buying and selling of stock.
Chapter 2 An Overview of the Financial System. © 2004 Pearson Addison-Wesley. All rights reserved 2-2 Function of Financial Markets 1. Allows transfers.
International Financial Markets. © Prentice Hall, 2006International Business 3e Chapter Chapter Preview Discuss the international capital market.
The Foreign Exchange Market & The Global Capital Market.
 Derivatives are financial instruments whose value is derived from the value of something else.  The main types of derivatives are: futures forwards.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.
Chapter Two Overview of the Financial System Slide 2–3 Function of Financial Markets Allows transfers of funds from person or business without investment.
1-1 Faculty of Business and Economics University of Hong Kong Dr. Huiyan Qiu MFIN6003 Derivative Securities Lecture Note One.
Chapter 1 Why Study Money, Banking, and Financial Markets?
1 Chapter 5 Secondary Market Making. 2 A.Secondary Market Making – Dealer/Broker Activity 1. Give financial claims greater liquidity  Investors  Issuers.
Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Chapter 3 Security Markets.
An Overview of the Financial System chapter 2 1. Function of Financial Markets Lenders-Savers (+) Households Firms Government Foreigners Financial Markets.
© 2013 Pearson Education, Inc., publishing as Prentice Hall. All rights reserved.2-1 The Uses of Derivatives Uses –Risk management. Derivatives are a tool.
Chance/BrooksAn Introduction to Derivatives and Risk Management, 8th ed.Ch. 1: 1 Chapter 1: Introduction It is only by risking our persons from one hour.
An Overview of the Financial System chapter 2. Copyright © 2002 Pearson Education Canada Inc Function of Financial Markets 1. Allows transfers of.
English for Finance 4/5/2011: Funds. Assignment Prepare Flash Cards for Funds terminology Prepare for Quiz on Friday on Wall Street Terminology Extra.
McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Money and Banking Lecture 6.
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 International Edition.
Role of Financial Markets and Institutions
Chapter 1 Introduction to Derivatives. © 2013 Pearson Education, Inc., publishing as Prentice Hall. All rights reserved.1-2 What Is a Derivative? Definition.
FINANCIAL DERIVATIVES/SNSCT/MBA
Introduction to Derivatives
Introduction to Derivatives
Presentation transcript:

Chapter 1 Introduction to Derivatives

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-2 What Is a Derivative? Definition  An agreement between two parties which has a value determined by the price of something else Types  Options, futures and swaps Uses  Risk management  Speculation  Reduce transaction costs  Regulatory arbitrage

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-3 Observers End user End user Intermediary Economic Observers  Regulators  Researchers Three Different Perspectives End users  Corporations  Investment managers  Investors Intermediaries  Market-makers  Traders

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-4 Financial Engineering The construction of a financial product from other products New securities can be designed by using existing securities Financial engineering principles  Facilitate hedging of existing positions  Enable understanding of complex positions  Allow for creation of customized products  Render regulation less effective

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-5 The Role of Financial Markets Insurance companies and individual communities/families have traditionally helped each other to share risks Markets make risk-sharing more efficient  Diversifiable risks vanish  Non-diversifiable risks are reallocated Recent example: earthquake bonds by Walt Disney in Japan

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-6 Exchange Traded Contracts Contracts proliferated in the last three decades What were the drivers behind this proliferation?

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-7 Increased Volatility… Oil prices: 1951–1999 DM/$ rate: 1951–1999

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-8 …Led to New and Big Markets Exchange-traded derivatives Over-the-counter traded derivatives: even more!

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-9 Basic Transactions Buying and selling a financial asset  Brokers: commissions  Market-makers: bid-ask (offer) spread Example: Buy and sell 100 shares of XYZ  XYZ: bid = $49.75, offer = $50, commission = $15  Buy: (100 x $50) + $15 = $5,015  Sell: (100 x $49.75) – $15 = $4,960  Transaction cost: $5015 – $4,960 = $55

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Bid-Ask Spread Viewpoint of Market Maker PriceMagnitudeFor Market Maker For Investor BidLowerBuy PriceSell Price AskHigherSell PriceBuy Price

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Short-Selling Long Position or “Go Long”  You pay money up front. Short Sale or Short or Go Short or Short Position  You collect money up front

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Short-Selling When price of an asset is expected to fall  First: borrow and sell an asset (get $$)  Then: buy back and return the asset (pay $)  If price fell in the mean time: Profit $ = $$ – $  The lender must be compensated for dividends received (lease-rate) Example: short-sell IBM stock for 90 days

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Short-Selling (cont’d) Why short-sell?  Speculation  Financing  Hedging Credit risk in short-selling  Collateral and “haircut” Interest received from lender on collateral  Spread is additional cost  Scarcity decreases the interest rate  Repo rate in bond markets  Short rebate in the stock market

Feedback: Privacy Policy Feedback
Do Not Sell My Personal Information
About project: SlidePlayer Terms of Service

© 2024 SlidePlayer.com. Inc. All rights reserved.