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    Derivative Securities Market

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    Claudette Blance
    Derivative markets allow parties to transfer risk by entering into contracts that derive their value from underlying assets. There are several types of derivative contracts: 1. Forward contracts involve the exchange of assets at a future date at a pre-determined price. Common types include outright forwards, long-dated forwards, and flexible forwards. 2. Futures contracts are standardized agreements to exchange assets at a future date, traded on regulated exchanges. Types include stock, currency, index, and commodity futures. 3. Options contracts provide the right but not obligation to buy or sell assets at a particular price by a specified date. Common types are calls and puts. 4. Swaps involve exchanging cash flows of one

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    Derivative Securities Market

    Uploaded by

    Claudette Blance
    11 views2 pages
    Derivative markets allow parties to transfer risk by entering into contracts that derive their value from underlying assets. There are several types of derivative contracts: 1. Forward contracts involve the exchange of assets at a future date at a pre-determined price. Common types include outright forwards, long-dated forwards, and flexible forwards. 2. Futures contracts are standardized agreements to exchange assets at a future date, traded on regulated exchanges. Types include stock, currency, index, and commodity futures. 3. Options contracts provide the right but not obligation to buy or sell assets at a particular price by a specified date. Common types are calls and puts. 4. Swaps involve exchanging cash flows of one

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    Derivative-Securities-Market (Financial Market

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    Derivative-Securities-Market

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    Derivative markets allow parties to transfer risk by entering into contracts that derive their value from underlying assets. There are several types of derivative contracts: 1. Forward contracts involve the exchange of assets at a future date at a pre-determined price. Common types include outright forwards, long-dated forwards, and flexible forwards. 2. Futures contracts are standardized agreements to exchange assets at a future date, traded on regulated exchanges. Types include stock, currency, index, and commodity futures. 3. Options contracts provide the right but not obligation to buy or sell assets at a particular price by a specified date. Common types are calls and puts. 4. Swaps involve exchanging cash flows of one

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    11 views2 pages

    Derivative Securities Market

    Uploaded by

    Claudette Blance
    Derivative markets allow parties to transfer risk by entering into contracts that derive their value from underlying assets. There are several types of derivative contracts: 1. Forward contracts involve the exchange of assets at a future date at a pre-determined price. Common types include outright forwards, long-dated forwards, and flexible forwards. 2. Futures contracts are standardized agreements to exchange assets at a future date, traded on regulated exchanges. Types include stock, currency, index, and commodity futures. 3. Options contracts provide the right but not obligation to buy or sell assets at a particular price by a specified date. Common types are calls and puts. 4. Swaps involve exchanging cash flows of one

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    © All Rights Reserved
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    DERIVATIVE SECURITIES MARKET (4) Types of Forward Contract

    Derivative Market is a market developed over time to • Closed Outright Forward: This is the simplest type of a
    transfer risk from one party to another. forward contract, where both parties agree to exchange
    currencies at a future date by locking in an exchange
    Markets are used to transfer goods, services, funds or price. These are also known as European contracts or
    risk. Standard Forward Contracts.

    Derivative Contract derives its value from an underlying • Long-Dated Forward: These have the same
    asset such as a stock, currency, or commodity, hence the functionality as any forward contract, except that the
    name derivative. settlement period often extends over more than a year.
    Generally, most forward contracts are short term
    (3) Components of Derivative Contract contracts, which is what differentiates the long date
    forward contracts from the rest of them,
    1. Underlying Asset
    2. Maturity Date • Flexible Forward: With flexible forwards, the parties
    3. Counterparties with long/short positions can exchange the funds before the settlement date, often
    in parts, as long as the entire amount is settled by the due
    1. Underlying Asset: An investment term that refers to date.
    the real financial asset or security that a financial
    derivative is based on. Few common underlying assets: • Non-Deliverable Forward: Usually, parties enter into
    Stocks, Bonds, Currencies, Commodities, Market Indices, forward contracts over a physical exchange of a
    and Interest Rates commodity, an asset, or currency. However, with non-
    deliverable forwards, the parties only exchange the
    2. Maturity Date: This is the date when the contract difference between the contract rate and the spot rate at
    agreement ends. Delivery type at expiration: Physical the time of maturity.
    Delivery and Cash Settled
    Future Contract is similar to a forward contract. It is a
    3. Counterparties with long/short positions standardized agreement to exchange an underlying asset
    for a predetermined price at a specified date in the
    • Long Positions: Derivative Market expects that future, traded on regulated exchanges.
    the stock will rise in value in the future.
    • Short Positions: Derivative Market who sell (5) Types of Futures Contracts
    short, believe that the price of the stock will
    decrease in value. • Stock futures: Contracts to buy or sell a specified
    amount of stock at a predetermined price on a future
    Purpose of Derivative Contract date.

    • Hedging involves protecting a current financial position • Currency futures: Agreements to exchange one
    from potential losses. currency for another at an agreed-upon price on a future
    • Speculating involves trying to make guesses about the date.
    direction of the underlying asset’s value to make a profit.
    • Index futures: Contracts based on the future value of a
    Types of Derivative Contract stock index, allowing investors to speculate on the
    direction of the market.
    Forward Contract is an agreement between two parties
    to exchange an asset for a pre-specified price on a specific • Commodity futures: Contracts to buy or sell a
    date in the future. These contracts are customized to the commodity at a predetermined price on a future date,
    needs of the parties involved, allowing for flexibility in commonly used by producers and consumers to hedge
    terms such as quantity, quality, delivery date, and against price fluctuations.
    settlement terms.
    • Interest rate futures: Contracts based on the future
    interest rate of a financial instrument, allowing investors • Opportunities
    to hedge against or speculate on changes in interest
    rates. o Diversification: Presents opportunities for
    investors to diversify their portfolios and manage
    Option Contract. Contracts that give the holder the risks more effectively.
    option to buy/sell specified quantities of the underlying o Innovation: Can lead to the development of
    assets at a particular price on or before a specified time innovative financial instruments and trading
    period. The word option means that the holder has the strategies.
    right but not the obligation to buy/sell underlying assets. o Harmonization of rules: Regulators responded to
    the challenges by working to harmonize
    (2) Types of Option Contract regulations across jurisdictions.

    • Call option give the buyer the right but not obligation
    to buy a given quantity of the underlying asset.

    • Put Option give the seller the right but not obligation
    to sell a given quantity of the underlying asset.

    Swap Contract is a derivative contract in which one party


    exchanges or swaps the values or cash flows of one asset
    for another.

    Caps, Floors, and Collars

    • Interest Rate Caps: limit the maximum interest rate


    that a borrower will pay on a loan, providing protection
    against rising interest rates.

    • Interest Rate Floors: establish a minimum interest rate


    that a lender will receive on a loan, protecting against
    falling interest rates.

    • Interest Rate Collars: combine a cap and a floor to


    create a range of interest rates in which the borrower and
    lender are both protected, providing a balance between
    risk and reward.

    International Aspect of Derivative Securities Market

    • Challenges

    o Complexity of cross-border transactions: Can be


    complex, involving multiple legal and regulatory
    frameworks.
    o Potential for contagion across markets: The
    global nature of the derivative securities market
    means that shocks in one market can quickly
    spread to others, potentially causing systemic
    risks to the financial system.
    o Lack of transparency: Can lead to information
    asymmetry and market inefficiencies.

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