“a derivative is a financial instrument that is derived from some other asset, index, event, value...
TRANSCRIPT
DERIVATIVES
FATIMA RAZA (1917/FMS/BBA/S07)KAUSAR WAHAB (1924/FMS/BBA/S07)NITASHA MUBASHAR (1934/FMS/BBA/S07)
KAUSAR WAHAB
DERIVATIVES
“A derivative is a financial instrument that is derived from some other asset, index, event, value or condition (known as the underlying
asset)”
TYPES OF DERIVATIVES
Four main types of derivatives:
1. Forwards2. Futures3. Options
4. Swaps
TYPES OF DERIVATIVES
1. FORWARDS
“ A forward contract is an agreement between a corporation and a commercial bank to exchange a specified amount of a
currency at a specified exchange rate (called the forward rate) on a specified date in
future”
1.FORWARDS
FORMULA FOR FORWARDS
F=S (1+p)
WhereS=Spot Ratep=premium
FORMULA FOR FORWARDS
2. FUTURES
“A futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument
at a certain date in the future, at a specified price”
2.FUTURES
FORWARDS Vs FUTURES
Tailored to individuals need
Expiry date and contract size depends on the transaction
Negotiated directly by the buyer and seller
Standardized Standardized contract
size n expiry date Quoted and traded on
the Exchange
FORWARDS FUTURES
FATIMA RAZA
Currency Options Market
• Currency options provide the right to purchase or sell currencies at specified prices. Options can be purchased or sold through brokers for a commission.
TYPES OF OPTIONS
• An option that can be exercised at any time before and on the expiration date.
American Option
• An option that can be exercised only on the expiration date.
European Option
Currency
options are classified as
Currency put
options
Currency call
options
Currency Call Options
A currency call option grants the right to buy a specific currency at a designated price within a specific period of time. The price at which the owner is allowed to buy that currency is known as the exercise price or strike price.
Currency Call Options
If the spot rate of the currency rises above the strike price, owners of call options can “exercise” their options by
purchasing the currency at the strike price, which will be
cheaper than the prevailing spot rate. S>X
The owner can choose to let the option expire on the expiration date without ever exercising it.
A currency call option is said to be in the money when the
present exchange rate exceeds the strike price S>X
At the money when the present
exchange rate equals the strike price
S=X
Out of the money when the present
exchange rate is less than the strike price S<X
Buyer of call option
• + Selling price (S t+1)• - Purchase price (E)• - Premium paid for option (P)
Seller of call option
• + Selling price (E) • - Purchase price (S t+1)• + Premium paid for option (P)
Currency Put Options
The owner of a currency put option receives the right to sell a currency at a specified price (the strike price) within a specified period of time.
A currency put option is said to be in the money when the
present exchange rate is less than the
strike price S<X
At the money when the present
exchange rate equals the strike price
S=X
Out of the money when the present
exchange rate exceeds the strike price
S>X
+ Selling price (E)
- Purchase price (S t+1)
- Premium paid for option (P)
Buyer of put option
Seller of
put option
+ Selling price (S
t+1)
- Purchase price (E)
+ Premium paid for
option (P)
NITASHA MUBASHIR
“A Swap is a contract between two parties to deliver one sum of
money against another sum of money at periodic intervals”
4.SWAPS
TYPES OF SWAPS
Interest Rate Swap
Currency Swap
Credit Risk Swap
Commodity Swap
Equity Swap
“An exchange of fixed interest payment for floating interest
payments by two counterparties is called interest rate swap”
INTEREST RATE SWAP
TERMINOLOGIES USED
Swap Buyer (Long)
Swap Seller (Short)
Notional Principal
Swap Tenor
Floating and Fixed Rate
WHY DO FIs SWAP???
EXPLAINATION OF INTEREST RATE SWAP
POSITION OF COMPANIES
FLOATING RATE MARKET
FIXED RATE MARKET
ABC COMPANY
Bonds issued Loans issued to public
XYZ COMPANY
Loans issued to public
Bonds issued
Fixed Rate
Receiver (Return)
Floating Rate
Payment (Cost)
Bond Issued
Loan to
Public
POSITION OF COMPANY ABC
POSITION OF COMPANIESFLOATING RATE MARKET
FIXED RATE MARKET
ABC COMPANY
Bonds issued Loans issued to public
PUBLICPUBLIC PUBLICPUBLIC
ABC COMPANYABC COMPANY
POSITION OF COMPANY XYZ
Bond Issued
Loan to
Public
Fixed Rate
Payment (Cost)
Floating Rate
Receiver
(Return)
POSITION OF COMPANIESFLOATING RATE MARKET
FIXED RATE MARKET
XYZ COMPANY
Loans issued to public
Bonds issued
XYZ COMPANYXYZ COMPANY
PUBLICPUBLIC PUBLICPUBLIC
XYZ COMPANY
XYZ COMPANY
PUBLICPUBLIC
ABC COMPANY
ABC COMPANY
PUBLICPUBLIC
Swap contract
Swap contract
In swap contract: (buyer) In swap contract: (seller) Floating rate receiver Floating rate payment Fixed rate payment Fixed rate receiver
Fixed Floating Floating Fixed Rate Rate Rate RateReceiver Payment Receiver Payment
THE
END