Financial derivatives are financial instruments whose values are derived from an underlying asset such as a stock or currency.
currency forward
An agreement to deliver a currency for another at a certain future date for a given price.
- Major problem - default risk.
currency future
Similar to forward contract, but more standardized
- Initial margin
- Maintenance margin : profits and losses are paid every day at the end of trading.
- Marking to market
Futures Quotations
- Open : The opening prices on the day.
- High \ Low \ Settle : The highest \ lowest \ closing price for the day.
- Change : The change in the closing price form the previous day’s settle.
- High \ Low : The lifetime high \ low of this particular contract.
- Open interest : The outstanding 未完成 number of contracts obligated for delivery.
comparison between forward and futures contracts
| Characteristics | Forward contracts | Futures contracts |
|---|---|---|
| Amount of contract | Negotiated by two parties(1m-5m) | standardized contract |
| Maturity | 上 | 上 |
| Location | OTC market 银行之间 | Organized exchanges 证券交易所 |
| Fees | No | Commission 佣金 |
| Counter parties | banks, companies an others | Unknown to each other(clearinghouse) |
| Settlement | Nearly all physical delivery | Offsettign position |
| Collateral | Negotiated, depending on credit | Inital margin \ maintentce margin |
| Trading hours | 24h | exchange hours |
| Regulation | Self-regulating | Futures association |
currency option
an option gives the owner of the contract the right but not the obligation to buy or sell a currency at a predetermined price sometime in the future.
- holder : who buy the contract
- writer : who issues the contract
- strike price \ exercise price : 期权执行价
- option premium \ option price : 期权费
- call option : The right to buy 看涨
- put option : The right to sell 看跌
- American option : buy or sell the contract any time prior to the expiration date.
- European option : ... at the maturity of the contract.
- intrinsic value : the gain that would be realized if an option is the difference between the future spot rate and strike price.
- in-the-money : if a call option is in-the-money, it has intrinsic value.
- Call option : Max [ ( St - K ) , 0 ]
- Put option : Max [ ( K - St ) , 0 ]
- out-the-money : a call option for which the spot ex.rate is below the strike price.( ZERO )
- Option premium = Time value + Intrinsic value
currency swap
Involves the exchange of principal and interest in one currency for the same in another currency.
Background : The case that the local companies’ borrowing costs are lower than those of the foreign companies in the domestic financial markets.
Parallel loan
A funding method by which two borrowers can exchange the type of funds each one can most easily raise for the types of funds each really wants.
Advantages:
- get around tax
- save the cost of currency transactions, reduce exposure to currency risk.
- low borrowing costs
Disadvantage :
- default risk
- both companies’ outstanding liabilities are increased
- time-consuming and expensive ( hard to find partners )
