Derivatives Fundamentals - Investment Banking Training

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    Derivatives Fundamentals - Investment Banking Training - Presentation Transcript

    1. Derivative Fundamentals Financial Markets Education download the full document at: www.gazhoo.com
    2. SECTION 1 Derivatives an Overview download the full document at: www.gazhoo.com
    3. By far the most significant event in finance during the past decade has been the extraordinary development and expansion of financial derivatives. These instruments enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it - a process that has undoubtedly improved national productivity growth and standard of living. (Alan Greenspan, 1999) download the full document at: www.gazhoo.com 4
    4. Derivative definitions ♦ A derivative derives its value from the ‘properties’ of the underlying ♦ There are two main types of derivatives: – forwards/futures (swaps) – options ♦ A forward/future is an agreement to buy or sell an underlying at some time in the future at a fixed price (agreed today) ♦ An option is the right to buy or sell an underlying at some time in the future at a fixed price (agreed today) download the full document at: www.gazhoo.com 5
    5. Options Roadmap Basis Spot Forward Volatility Value Option download the full document at: www.gazhoo.com 6
    6. Underlyings – Spot Risk Price Risk Value of spot Capital 0 spot price spot price today download the full document at: www.gazhoo.com7
    7. Forward (a derivative) versus Spot ♦ A ‘forward’ has a risk profile which is very similar to that of the underlying Value of a future Value of spot 0 0 spot price spot price spot price today Price Risk Price Risk download the full document at: www.gazhoo.com Capital 8
    8. Option Risks ♦ Calls and puts represent different aspects of the price risk – Options allow us to separately trade the upside and downside risk ATM Options OTM Call, ITM Put Value Value Long Call spot price spot “good risk” today price 0 today strike 0 price Strike price Short Put “bad risk” Short Long Put Call Price Risk download the full document at: www.gazhoo.com 9
    9. Who uses derivatives ♦ Arbitrageurs – banks / trading houses – hedge funds ♦ Hedgers – corporates (treasurers) – banks ♦ Investors – pension funds – insurance companies – mutual funds – private individuals ♦ Speculators download the full document at: www.gazhoo.com 10
    10. Summary ♦ Derivatives can change your exposure to risk ♦ You can use them to reduce risk - hedging ♦ You can use them with no risk - arbitrage ♦ You can use them to create risk - speculating ♦ Derivatives are not inherently risky ♦ The behaviour of derivatives is predictable ♦ But understanding derivatives requires work! download the full document at: www.gazhoo.com 11

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