some random musings on derivatives psu sba brownbag presentation may 14, 2010
TRANSCRIPT
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Some random musings on derivatives
PSU SBA brownbag presentationMay 14, 2010
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A bit on my background
• Petroleum products purchasing in early 1990s.– Jet fuel in airline industry– Diesel fuel for wholesaler
• Designed “fixed-price” diesel fuel program for fuel wholesaler in 1992-94.
• Managed company’s fuel price risk by trading in crude oil and heating oil futures and options.
• Academic career: research on corporate hedging since 1995.
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Some general overview
• Derivative– Major types of derivatives
• Forward contracts• Swap contracts• Futures contracts• Option contracts
– Trading environment• Exchanges
– Clearinghouse bears credit risk• Over-the-counter (OTC)
– Historically, each counterparty bears the credit risk of other counterparty.
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Where do contracts trade?
• Forwards → OTC• Swaps → OTC• Futures → Exchanges• Options → Both
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What types of “underlying assets” trade in derivative markets?
• YOU NAME IT!– Currencies– Interest-rate– Commodities– Credit– Equity– Arcane contracts (weather, carbon, etc.)
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Current Issues
• Do derivatives pose “systemic risk” to economies?– Basis for AIG bailout → counterparty in many
credit default swaps (more on this idea later)
• Derivatives markets will ultimately be more regulated.
• Should all derivatives be cleared through central clearinghouse?