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R45 DERIVATIVE MARKETS AND INSTRUMENTS -SWAPS AND OPTIONS- - Coggle…
R45 DERIVATIVE MARKETS
AND INSTRUMENTS
-SWAPS AND OPTIONS-
SWAPS
Definition:
agreements
to exchange a series of payments on periodic settlement dates over a certain time period (e.g., quarterly payments over two years) - là một thỏa thuận dạng hợp đồng giữa hai bên đối tác, theo đó các bên đồng ý thực hiện các khoản thanh toán định kì cho nhau.
Swaps are similar to forwards in several ways
Swaps typically require no payment by either party at initiation.
Swaps are custom instruments.
Swaps are not traded in any organized secondary market.
Swaps are largely unregulated.
Default risk is an important aspect of the contracts.
Most participants in the swaps market are large institutions.
Individuals are rarely swaps market participants
Tenor: The length of the swap is termed the tenor
At each settlement date, the two payments are netted so that only one (net) payment is made. The party with the greater liability makes a payment to the other party
swaps facilitators who bring together parties with needs for the opposite sides of swaps : dealer, bank and brokerage firms ( làm trung gian)
Types:
fixed-for-floating interest rate swap
/
plain vanilla swap/vanilla swap/plain vanilla interest rate swap
:
one party
makes fixed- rate interest payments
on a
notional principal amount
specified in the swap in return for floating-rate payments from the other party
notional principal:
ordinarily matches the loan balance, a balance of sorts. A loan with
only one
principal payment, the final one, will be matched with a swap with a
fixed notional principal
. An
amortizing loan
, which has a
declining principal balance
, will be matched with a swap with a
pre-specified declining notional principal
that matches the loan balance.
Basic swaps:
-There are also interest rate swaps in which one party pays on the basis of one interest rate and the other party pays on the basis of a different interest rate
OPTIONS:
General:
Definition:
An option contract gives its owner the right, but not the obligation, to either buy or sell an underlying asset at a given price (the exercise price or strike price)
While an option buyer can choose whether to exercise an option, the seller is obligated to perform if the buyer exercises the option: call option and put option
The seller of an option is also called the
option writer
. There are four possible options positions
Long call
: the buyer of a call option—has the right to buy an underlying asset
Short call:
the writer (seller) of a call option—has the obligation to sell the underlying asset
Long put
: the buyer of a put option—has the right to sell the underlying asset
Short put:
the writer (seller) of a put option—has the obligation to buy the underlying asset
Other terms:
The price of an option is also referred to as the
option premium
.
American options
may be exercised at any time up to and including the contract’s expiration date
European options
can be exercised only on the contract’s expiration date
=> Tại ngày kết thúc thì giá american options và european options sẽ bằng nhau. Còn trước đó sẽ khác nhau
Credit Derivatives:
a contract that provides a bondholder (lender) with protection against a downgrade or a default by the borrower
most common type
:
Credit default swap (CDS)
which is essentially an insurance contract against default
Another type
of credit derivative is a
credit spread option
, typically a call option that is based on a bond’s yield spread relative to a benchmark
Call option profits and losses:
Put option profits and losses:
Explain arbitrage and the role it plays in determining prices and promoting market efϐiciency
Arbitrage is an important concept in valuing (pricing) derivative securities
If a return greater than the risk-free rate can be earned by
holding a portfolio of assets that produces a certain (riskless) return, then an arbitrage opportunity exists
There are two arbitrage arguments that are particularly useful in the study and use of derivatives: The ϐirst is based on the
law of one price
, The second type of arbitrage requires an investment