tailieunhanh - Lecture Principles of money, banking, and financial markets (12th edition): Chapter 9 - Ritter, Silber, Udell

Chapter 9 - Demystifying derivatives. In this chapter you will learn to visualize the structure of futures markets, describe how future contracts can be used to diversify portfolios, understand options contracts and their use in diversifying portfolios, recognize swap contracts and see their ability to limit interest rate risk. | Chapter 9 Demystifying Derivatives Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Learning Objectives • Visualize the structure of future market • Describe how future contracts can be used to diversity portfolios • Understand option contracts and their use in diversifying portfolios • Recognize swap contracts and see their ability to limit interest rate risk Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 9-2 Introduction • Futures, options, and swaps are complicated instruments • However, they have found their way into the risk management options of just about every major financial institution • Derivatives—A financial instrument/contract that derives its value from some other underlying asset Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 9-3 1 An Overview of Financial Futures • Future Contract is a contractual agreement that calls for delivery of a specific underlying commodity or security at some future date at a currently agreed-upon price • There are contracts on interest-bearing securities (Treasury bonds, notes, etc), on stock indices (Standard & Poors’ and Japan’s Nikkei index), and on foreign currencies Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 9-4 An Overview of Financial Futures (Cont.) • Trading in these contracts is conducted on the various commodity exchanges • Financial futures were introduced about 35 years ago and volume now exceeds the more traditional agricultural commodities Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 9-5 An Overview of Financial Futures (Cont.) • Characteristics of Financial Futures – Standardized agreement to buy/sell a particular asset or commodity at a future date and a current agreedupon price • Designed to promote liquidity—the ability to buy and sell quickly with low transactions costs • Promotes large trading volume which narrows the bidasked spreads • Allows many individuals to trade the identical commodity Copyright © 2009