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Introduction. Direction of Study Investments Derivative Securities Options, Futures, Swaps, Synthetics Corporate Financial Strategies Corporate Challenges.

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Presentation on theme: "Introduction. Direction of Study Investments Derivative Securities Options, Futures, Swaps, Synthetics Corporate Financial Strategies Corporate Challenges."— Presentation transcript:

1 Introduction

2 Direction of Study Investments Derivative Securities Options, Futures, Swaps, Synthetics Corporate Financial Strategies Corporate Challenges Derivative Security Usages Effective Management

3 Investments Derivative Securities Financial Contracts that “derive” their value from some underlying asset price. Options – Right to Buy/Sell Futures – Commitment to Buy/Sell Swaps – To switch out of one financial contract for another (usually multiple times across a horizon) Synthetic – OTC contract / Fin’l Engineer’g

4 Corporate Financial Strategies Corporate Challenges Product Price Uncertainties Selling Price, Cost of Materials, Volumes Financing Uncertainties Balance Sheet Funding Transaction Exposure Derivative Security Strategies vs. Operational Strategies Effective Management: Hedging vs. Speculation

5 Method of Study Toolbox: Options, Futures, Swaps, Synthetics Payoffs, Prices and Strategies In-class problems, At-home review materials Implementation Trading Online Hedge, Speculate Cases

6 Requirements Group Work (3 person groups) Trading Online Cases Individual Work 2 exams across quarter, no Final Exam MBAs: Paper on Derivatives (Plan an Appointment)

7 Why Risk Management? Higher Risk due to: Inflation/DisInflation Volatility of FX Rates Volatility of Interest Rates

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11 Market Response Commodity Prices Futures, Options, Swaps, Synthetics Foreign Exchange Futures, Options, Swaps, Synthetics Interest Rates Futures, Options (Caps & Floors), Swaps, Synthetic Debt

12 Size of Markets $516 Trillion Derivatives Markets OTC dominates Exchange Traded FX < 10% of Volume Stock Options: < 2% of Volume Due to SIVs and other Trading, Interest Rate Derivatives are 65+% of Total ($347 Trillion) About $275 Trillion in Interest Rate Swaps

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14 Reasons exist for active financial risk management SMOOTH EARNINGS!!! Match Supply of Internally-generated funds with Demand for funds for Capital Expenditures Match Employee’s incentives with Investors Match Information Advantage with Transaction Ability & Cost of Transaction

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