Derivative Markets

ContextLearning outcomesIntroductionThe financial system in briefUltimate lenders and borrowersFinancial intermediariesFinancial instrumentsSpot financial markets IntroductionPrimary and secondary marketsDebt marketShare / equity marketForeign exchange marketInterest ratesThe derivative marketsSummaryBibliographyDerivative markets: forwardsLearning outcomesIntroductionSpot market: definitionForward market: definitionAn exampleForward marketsForwards in the debt marketsIntroductionForward interest rate contracts IntroductionExample: OTC marketRepurchase agreements IntroductionDefinitionTerminologyExampleMotivation for reposInstitutions involved in the repo marketTypes of repurchase agreementsSecurities that underlie reposMathematics of the repurchase agreement marketRepos and the banking sectorListed repurchase agreementsForward rate agreements Forwards in the share / equity marketForwards in the foreign exchange market IntroductionOutright forwards IntroductionExample oneExample twoForeign exchange swapsForward-forwardsTime optionsFunctions/uses of the forward foreign exchange marketForwards in the commodities marketForwards on derivativesOrganisational structure of forward marketsSummaryBibliographyDerivative markets: futuresLearning outcomesIntroductionFutures definedIntroductionStandardised contract between two partiesBuyer and sellerDeliveryStandardised quantityStandardised qualityAssetPriceExpiry dateMarket priceAn exampleFutures trading price versus spot priceTypes of futures contractsOrganisational structure of futures marketsClearing houseMargining and marking to marketOpen interestCash settlement versus physical settlementPayoff with futures (risk profile)Pricing of futures (fair value versus trading price)Fair value pricing of specific futuresIntroductionShort-term interest rate futuresIndividual bond futuresEquity / share index futuresIndividual equity / share futuresCommodity futuresCurrency futuresFutures on other derivativesOther futuresBasisParticipants in the futures marketIntroductionInvestorsArbitrageursHedgersSpeculatorsClosing remarksHedging with futuresIntroductionHedging basics and jargonHedging using the 3-month JIBAR futureHedging with share index futuresHedging with currency futuresBasis tradingSpread tradingFutures market contractsRisk management by a futures exchangeEconomic significance of futures marketsIntroductionPrice discoveryMarket liquidityMarket efficiencyAllocation of resourcesCapital formationOutputCompetitionNew product developmentPublic welfareSummaryBibliographyDerivative markets: swapsLearning outcomesIntroductionInterest rate swapsIntroductionMotivation for interest rate swapsCoupon swap: transforming a liabilityCoupon swap: transforming an assetCoupon swap: comparative advantageVariations on the themeCurrency swaps DefinitionSimple currency swapComparative advantage currency swapVariations on the themeEquity / share swaps IntroductionExample of equity / share swapVariations on the themeCommodity swapsListed swapsOrganisational structure of swap marketSummaryBibliographyDerivative markets: optionsLearning outcomesIntroductionThe basics of options DefinitionsPayoff profiles IntroductionCall option: buy (long call) at expiryCall option: sell (write) (short call) at expiryPut option: buy (long put) at expiryPut option: sell (write) (short put) at expiryIntrinsic value and time valueIntroductionIntrinsic valueTime valueOption valuation/pricingIntroductionBlack-Scholes modelIntroductionSpot (current) price of underlying asset and exercise priceTime to expirationRisk free rateDividendsVolatilityThe modelExample of black-scholes option pricingBinomial modelOther modelsThe GreeksOrganisational structure of option marketsOptions on derivatives: futuresIntroductionExampleOption specificationsOptions on derivatives: swapsOptions on debt market instrumentsIntroductionOptions on specific money market instrumentsCaps and floors DescriptionCapsFloorsOptions on specific bondsOptions on bond indicesBond warrants (call options)Bond warrants (retail options)Callable and puttable bonds (bonds with embedded options)Convertible bondsOptions on equity / share market instrumentsIntroductionOptions on specific equitiesOptions on equity / share indicesEquity / share warrants (call options)Equity / share warrants (retail options)Redeemable preference sharesOptions on foreign exchange IntroductionOptions on foreign exchange (wholesale)Options on foreign exchange (retail: warrants)Options on commoditiesOption strategiesIntroductionStraddleStrangleDelta hedgingExotic optionsSummaryBibliographyOther derivativesLearning outcomesIntroductionSecuritisationCredit derivatives IntroductionExample of credit default swapPricingWeather derivativesCarbon credit derivativesFreight (or shipping) derivativesEnergy derivativesSummaryBibliography
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