Tài chính doanh nghiệp - Chapter 1: Introduction

© 2004 South-Western Publishing1Derivatives: An Introductionby Robert A. StrongUniversity of MainePrepared by Oliver SchnusenbergThe University of North Florida© 2004 South-Western Publishing2Chapter 1Introduction3OutlineIntroductionTypes of derivativesParticipants in the derivatives worldUses of derivativesEffective study of derivatives4IntroductionThere is no universally satisfactory answer to the question of what a derivative isOften when a market participant suffers a large newsworthy loss, the term “derivatives” is used almost as if it were an explanation“anything that results in a large loss”“dreaded D word”“beef derivative”5Introduction (cont’d)Futures and options markets are very useful, perhaps even essential, parts of the financial systemFutures and options markets have a long history of being misunderstood6Introduction (cont’d)“What many critics of equity derivatives fail to realize is that the markets for these instruments have become so large not because of slick sales campaigns, but because they are providing economic value to their users”Alan Greenspan, 19887Types of DerivativesCategories of derivativesOptionsFutures contractsSwapsProduct characteristics8Categories of Derivatives FuturesListed, OTC futuresForward contracts OptionsCallsPuts SwapsInterest rate swapForeign currency swapDerivatives9OptionsAn option is the right to either buy or sell something at a set price, within a set period of timeThe right to buy is a call optionThe right to sell is a put optionYou can exercise an option if you wish, but you do not have to do so10Futures ContractsFutures contracts involve a promise to exchange a product for cash by a set delivery dateFutures contracts deal with transactions that will be made in the future11Futures Contracts (cont’d)Futures contracts are different from options in that:The buyer of an option can abandon the option if he or she wishesThe buyer of a futures contract cannot abandon the contract12Futures Contracts (cont’d)Futures Contracts Example The futures market deals with transactions that will be made in the future. A person who buys a December U.S. Treasury bond futures contract promises to pay a certain price for treasury bonds in December. If you buy the T-bonds today, you purchase them in the cash, or spot market. 13Futures Contracts (cont’d)A futures contract involves a process known as marking to marketMoney actually moves between accounts each day as prices move up and downA forward contract is functionally similar to a futures contract, however:There is no marking to marketForward contracts are not marketable14SwapsIntroductionInterest rate swapForeign currency swap15IntroductionSwaps are arrangements in which one party trades something with another partyThe swap market is very large, with trillions of dollars outstanding16Interest Rate SwapIn an interest rate swap, one firm pays a fixed interest rate on a sum of money and receives from some other firm a floating interest rate on the same sumPopular with corporate treasurers as risk management tools and as a convenient means of lowering corporate borrowing costs17Foreign Currency SwapIn a foreign currency swap, two firms initially trade one currency for another Subsequently, the two firms exchange interest payments, one based on a foreign interest rate and the other based on a U.S. interest rateFinally, the two firms re-exchange the two currencies18Product CharacteristicsBoth options and futures contracts exist on a wide variety of assetsOptions trade on individual stocks, on market indexes, on metals, interest rates, or on futures contractsFutures contracts trade on products such as wheat, live cattle, gold, heating oil, foreign currency, U.S. Treasury bonds, and stock market indexes19Product Characteristics (cont’d)The underlying asset is that which you have the right to buy or sell (with options) or the obligation to buy or deliver (with futures)Listed derivatives trade on an organized exchange such as the Chicago Board Options Exchange or the Chicago Board of Trade20Product Characteristics (cont’d)OTC derivatives are customized products that trade off the exchange and are individually negotiated between two partiesOptions are securities and are regulated by the Securities and Exchange Commission (SEC)Futures contracts are regulated by the Commodity Futures Trading Commission (CFTC)21Participants in the Derivatives WorldHedgingSpeculationArbitrage22HedgingIf someone bears an economic risk and uses the futures market to reduce that risk, the person is a hedgerHedging is a prudent business practice and a prudent manager has a legal duty to understand and use the futures market hedging mechanism23SpeculationA person or firm who accepts the risk the hedger does not want to take is a speculatorSpeculators believe the potential return outweighs the riskThe primary purpose of derivatives markets is not speculation. Rather, they permit the transfer of risk between market participants as they desire24Hedgers and SpeculatorsHedgersSpeculatorsRisk Transfer25ArbitrageArbitrage is the existence of a riskless profitArbitrage opportunities are quickly exploited and eliminated26Arbitrage (cont’d)Persons actively engaged in seeking out minor pricing discrepancies are called arbitrageursArbitrageurs keep prices in the marketplace efficientAn efficient market is one in which securities are priced in accordance with their perceived level of risk and their potential return27Uses of DerivativesRisk managementIncome generationFinancial engineering28Risk ManagementThe hedger’s primary motivation is risk management“Banks appears to have effectively used such instruments to shift a significant part of the risk from their corporate loan portfolios”Alan Greenspan, 200229Risk Management (cont’d)Someone who is bullish believes prices are going to riseSomeone who is bearish believes prices are going to fallWe can tailor our risk exposure to any points we wish along a bullish/bearish continuum30Risk Management (cont’d)FALLING PRICES FLAT MARKET RISING PRICES EXPECTED EXPECTED EXPECTED BEARISH NEUTRAL BULLISH Increasing bearishness Increasing bullishness31Income GenerationWriting a covered call is a way to generate incomeInvolves giving someone the right to purchase your stock at a set price in exchange for an up-front fee (the option premium) that is yours to keep no matter what happensWriting calls is especially popular during a flat period in the market or when prices are trending downward32Financial EngineeringFinancial engineering refers to the practice of using derivatives as building blocks in the creation of some specialized productFinancial engineers:Select from a wide array of puts, calls futures, and other derivativesKnow that derivatives are neutral products (neither inherently risky nor safe)33Effective Study of DerivativesThe study of derivatives involves a vocabulary that essentially becomes a new languageImplied volatilityDelta hedgingShort straddleNear-the-moneyGamma neutralityEtc.34Effective Study of Derivatives (cont’d)All financial institutions can make some productive use of derivative assetsInvestment housesAsset-liability managers at banksBank trust officersEndowment fund managersMortgage officersPension fund managersEtc.