Please enable JavaScript.
Coggle requires JavaScript to display documents.
Chapter 3: Derivatives - Coggle Diagram
Chapter 3: Derivatives
Futures & Forwards
Futures
Pricing
Contango
Futures price is
higher than spot price
Backwardation
Futures price lower
than spot price
Basis
Difference between
spot price and future price
Standardised contracts traded
on exchanges
Underlying assets
Commodities
Metals
Grains
Softs
Energy
Financial
Bonds
Interest Rates
Currency exchange
Equity stock indices
Margin
Marked to market on
a daily basis
Margin call issued when account
drops below
maintenance level
Client required to restore account
to initial margin
Forwards
Pricing
\(Spot\ Price + Cost\ of\ Carry = Forward Price\)
Spot Price
Current cost of the commodity
Cost of carry
Cost of storage, interest, transport costs
Non-standardised contracts traded
OTC between 2 parties
not subjected to
margin requirements
Market participants
Hedgers
lock in future prices to protect
from unfavourable price changes
Speculators
put money at risk to profit
from anticipated changes
Options & Warrants
European style
Contract can only be
exercised on
expiration
American style
Contract can be exercised on
any trading day on or before expiration
Call :phone: (buy)
IN THE MONEY
Strike price less
than market price
OUT OF MONEY
Strike price
higher
than market price
Buy call - Buy right to buy at strike price
Sell call - Obliged to sell at strike price
Strike price
Price at which underlying security is
agreed to be traded in the future
Put :put_litter_in_its_place: (sell)
IN THE MONEY
Strike price more
than market price
AT THE MONEY
Strike price equal market price
OUT OF MONEY
Strike price
lower
than market price
Buy a put - Buy right to sell at strike price
Sell put - obliged to buy at strike price
Types of Options
Plain Vanilla
Option with no conditions
on its parameters
Exotic
Asian
Payoff calculated against average price
of underlying assets over a period
Compound
Option on an option
(i.e. underlying asset is an option)
Chooser
Investor decides whether option
is put or call by specified choice date
Barrier
Binary
Offers payout if option
expires in the money
Initial investment lost if
option expires out of the money
Swaption
Rainbow
Bullish Option Strategies
Long calls
Basically buying a call :phone: option
Covered calls
Sell call option on
stock already owned
Price :droplet:
Call option expires worthless and
seller pocket premium from selling call
Premiums offset losses made on stocks
Price :fire:
Buyer exercises call and seller sells at
strike price (lower) but still pockets premium
Seller earns premium but
limits upside potential
Lowers breakeven price for the seller by
the amount of the premium
Protective puts
Price :droplet:
Able to exercise option and sell stocks at
strike price when market price drops
Downside protection
Price :fire:
Sell stock but lose on put option
out of the money when market price rise
Exposure to unlimited upside
Profit pattern of buying a call
Buy put option on stock
already owned
Selling naked puts
Price :droplet:
Buyer exercises put and
seller obliged to buy at strike price
Seller able to purchase stock
at lower price
Allows for purchase of underlying
asset at lower net cost
Strike Price - Premium collected
Obligation to buy at strike price
upon expiry
Price :fire:
Put option expires worthless and
seller pockets premium
from selling put
Upside limited by premium
received from buyer
Bearish Option Strategies
Long puts
Buy a put option
Sell Naked calls
Price :droplet:
Option expires worthless and
seller pockets premium
Price :fire:
Option exercised and seller must buy stock
at higher market price and sell at lower strike price
Selling call option without
owning the stocks
Payout limited to premium but
unlimited downside
Swaps
Interest Rate Swaps
Swap usually between
floating rate
and
fixed rate
When institutions have advantage in one
but believe they can improve cash flow with the other
Credit Default Swaps
Transfers credit risk of bonds/loans to another party
in exchange for premium payments to them
Similar to insurance by protecting
against credit defaults
Equity Swap
Exchange of cash flow from equities
with fixed income-based rate
Used to avoid cross-border
investment barriers
Contract For Differences (CFD)