2. Introduction
๏ Derivatives Market is bigger than stock Market.
๏ It comes from Securitization.
๏ It shifts Risk within participants.
๏ It is too risky and high leveraged .
๏ It Reduces transaction cost. It provides
๏ price information.
๏ Great deal of liquidity
๏ Attract different types of dealers
3. Exchange trade and OTC
๏ Option and Future Contracts @Standardized
exchange trade backed by clearinghouse. (CME
,CBOE )
๏ Forward, Swaps and Bond Option @ Unregulated
OTC / Dealer Market has no central location with
high credit risk. Bigger than Exchange-trade with
easier term of contract and free negotiation.
๏ Electronic trading, Robo, Black box,
automated, high frequency
4. Contract Commitment Vs. Contingent Claim
๏ Forward Contract: Spot Contract is a
legally promise to perform an action in
future. Same as Forward, future, swap,
๏ Contingent Claim for broken certain
threshold. Same as Option
๏ Two options replicate a forward or future
contract.
๏ Long position payoff: ST-K
๏ Short position payoff: K-ST
5. Types of Participant and
trader
๏ Participants:
1. Buyer of call
2. Seller of call
3. Buyer of put
4. Seller of put
๏ Trader:
1. Hedger
2. Speculator
3. Arbitrageur
6. Arbitrage
๏ Two identical payoff have the same price.
๏ Certain pay off of a portfolio is more than risk
free rate.
๏ Market Efficiency.
๏ Mispricing asset bring up arbitrage opportunity.
๏ Combining uncertain returns in portfolio to result
certain return.
7. Hedger
Reducing Risk with no guarantee of better off.
Always avoid of exposure to risk.
๏ Using Forward Contract
Locking the exchange rate in forward contract. It
Neutralizes by Fixing the price.
๏ Using Option
Stock option is used to protect losing on stock price
and provide insurance.
Upfront fees is needed
8. Speculator
Looking for a position of exposure.
๏ Using Future
In hope of strength of currency:
1. Purchase currency in spot market.(need high
investment)
2. take long position in future contract on currency.
๏ Using option
In hope of stock price growth:
1.Purchse stock
2.Long position in call option (more profitable)
9. Arbitrageur
๏ Locking in riskless profit in two or more Market
๏ Caused by discrepancy of price in two markets
๏ Last very short as Market get balance by demand
and supply and transaction costs.
