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(3) DERIVATIVES (WHAT?: (Hedging Tools (Potection) (Protect Stock…
(3) DERIVATIVES
WHAT?:
Delayed Delivery
Agreement
Hedging Tools
(Potection)
Protect Stock Portfolio
When Market Down
Derive Value
of Underlying Entity
Assets
Examples:
Weather
Agri
Products
Corn
Soy Bean
Metals
Energy
Crude Oil
Financials
Physical
Equity
Bond
Currency
Intangible
Equity Index
Bond Index
Interest Rates
Owner
Don't Own Contract
Directional Bets
TYPES
Futures and Forwards
Definations:
Obligations:
To Buy (Call Contract)
To Sell (Put Contract)
To the
'Underlying'
In Specific Qty
At Specified Price
On Specified Future Dates
2 Ways
to Fulfill:
Physical Delivery
Cash Settlement
Character
Between Both:
Futures
Standardised Contracts
Subject to
Margin Requirements
Can Daily Settlement
Safer Contract
Forward
Non Standard Contracts
Not Subject to
Margin Requirement
Only Delivery Date
Settlement
Examples:
Crude Oil Market
(Brent Market)
Book Out Process
Commodities
Eg: Corn, Wheat
Cost Insurance
Freight (CIF)
Eg: Amazon Service
Free On
Board (FOB)
Eg: V Post Service
Eg: Coffee Farmer and Starbucks
Fix Price
for Future Dates
Both Sides Subject to
Binded Lost or Gain
Pricing Methods
Forwards:
Forward Price - Spot Price = Cost of Carry
Premium when (+)
Discount when (-)
Futures:
Spot Price - Futures Price = Basis
Contango
Market,
Basis is (-),
'UNDER'
When SP < FP
Backwardation
,
Basis is (+),
'OVER'
When SP > FP
Margins
For Futures Only
Initial
Maintenance
Benchmark
Variation
Calls When Acct
< Maintenance
Need to Top Up
to Initial Value
Market
Participation
Hedgers
Calm
Protection from Rising Price
Eg: Tyre Co. Buys Rubber
Short Hedging
with Futures
Protect Declining
Asset Price in Future
Speculators
Volatile
Provide Market
Liquidity
Speculating with Futures
Unlimited Upside
Unlimited Downside
Options And Warrants
Definations:
Right Only (Not Obligations)
to Buy /Sell
No Value After Expiry
Can OTC trade
Settled Through
Physical Delivery
American Style:
Exercise on /before Expiry
European Style:
Exercise on Expiration
Call Options
(🐂 to Buyer)
Long Call / Buy Call / Holder
Max Loss = Premium Paid
In the Money = Market Price > Strike Price
Out of Money = Market Price < Strike Price
Max Gain = Unlimited,
When Market
UP
Buyer Has Right
to Purchase @ Strike Price
Short Call / Sell Call / Writer
Max Gain = Premium Received
Max Loss = Unlimited,
When Market Up
Obliged to Sell
Put Options
(Bearish to Buyer)
Long Put / Buy Put / Holder
Max Loss = Premium Paid
In the Money = Market Price < Strike Price
Out of Money = Market Price > Strike Price
Buyer Has Right
to Sell @ Strike Price
Max Gain = Unlimited,
When Market
FALLS
Short Put /Sell Put / Writer
Max Gain = Premium Received
Max Loss = Unlimited,
When Market Falls
Discount to
Current Market
Obliged to Buy
Exotic Options
Asian
Payofff by Average Price
Forward Start
Effect in Future Date
Barrier
Exercise when Assets
Cross or Reach Barrier Level
Trading Strategies
🐂
Long Call (Explained)
Protective Put
= Long Stock + Buy Put (Long Put)
= Premium Paid (when Lost)
Covered Calls
= Premium Paid (when Rise)
= Long Stock + Short Call
Reduce Breakeven Point
Eg: OCBC
Neutral
Bull Stradle
Expect Market
Big Move
BUY
Call and Put at
Same SP and Expiry
Bear Stradle
Expect Market
Don't Move
SELL
Call and Put at
Same SP and Expiry
Bearish
Long Put (Explained)
Naked Calls
= Short Call (Explained)
Highest Risk to Seller
Swaps
2 Parties Exchange
Cash Flow
Future Dates
Nothing is Bought
or Sold
Examples:
Credit Default Swap
Credit Risk
Swap with
Fee Payments
Eg: Insurance for Loans
Currency Swap
Without Netting
Cross-currency
Interest Rate Swap
Interest Payment on Fixed Rate Loan
Swap with
Payments on Floating Rate Loan
Netted Cash Flow
Same Day Swap
Not Swapping
Principle Amt
CFD
CFD Providers
Contract with
Investors
Features:
Trades Like Stocks
Trade Both
Long, Short
No Expiry Dates
Receive Dividends for Long CFD
https://www.investopedia.com/terms/c/contractfordifferences.asp
CFD
= Contract for Difference