Contracts Derivatives

Contracts Derivatives
Why do they call these contracts derivatives? Where is the optionality in these contracts?
Weather derivatives structures commonly used are:
i) cap – a call option; ii) Floor – a put option; iii) Collar – a put and a call option, usually with little
or no premium; iv) Swap – a derivative with a profit and loss profile of a futures contract
v) Digital option – an option that pays either a predetermined amount if acertain temperature or
degree day level is reached, or nothing at all in other case.
A business with weather exposure may choose to buy or sell a futures contract, Which is
equivalently to a swap such that one counterparty gets paid if the degree Day over a specific period
are greater than the strike level, and the other ... Show more content on Helpwriting.net ...
They generated an idea of creating financial tools built around an index that was familiar to every
energy company, that of degree–days. Unlike many other financial products it was easy to create this
index, because weather is independently measured. As people have different opinions on which way
the weather index was going to go (warmer or colder) then a market was, in principle, possible. At
first insurance companies were unimpressed so Enron decided to act as a risk capacity provider to
start the market. In 1997, the first major deal took place between three US energy companies, which
created sufficient publicity to persuade insurance companies into the market. The underlying issues
about data and pricing were also being resolved. In the UK, the first weather derivative deal was
sold by Enron to Scottish Hydropower who, at that time, 1998, were taking part in a government
pilot scheme for the privatization and deregulation of energy markets.
Figure 1 Who needs weather derivatives?
Any company whose revenue is affected by weather has a potential need for weather derivatives.
Some of these industries include
Soft drinks and confectionery retailers
Agriculture
Hotels and leisure industry
Sports
Engineering and Construction industry
Energy producers and distributors
Insurance, Reinsurance companies
Banks and financial institutions
Breweries, pubs and restaurants
Transport and distribution companies
Figure

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A Study On Financial Derivatives With Special Reference Essay
A STUDY ON FINANCIAL DERIVATIVES WITH SPECIAL REFERENCE TO NIFTY F&O
ABSTRACT
Derivatives are the contracts whose value is derived from the value of some underlying assets such
as equities, commodities or currencies. These contracts helps the investor to reduce the risk of
wearing down of his investments. The application of derivatives can be observed as an opportunity
to transfer the risk from the person who wish to ignore it, to the person who is ready to accept it i.e.
risk management hedging through derivatives. In an environment, in which portfolio managers are
pressured to beat the indices, need to protect the investment gains in their portfolios from financial
risk. Different hedging strategies can be formulated to meet the particular hedging requirements.
Various studies on the outcomes of future and option listing on the underlying asset (equity,
commodity, currency market) have been done with a
view to study potential of financial derivatives and intensification of derivatives as a hedging
instrument. NSE traded derivatives have shown an exponential growth in market turnover, it has
grown from Rs 2365 cr. in 2000–2001 to Rs 22916531.92 cr. in 2015–16. NSE can be considered as
the one of the high–flying exchanges amongst the entire emerging markets in terms of equity
derivatives. The following study tries to make an understanding of operational concepts of F&O
mechanism. It encompasses analysis of Nifty Index future & options one month delivery contacts to
get

Show How Transactions in Derivatives Can Be Used to Either...
Economics of the Financial System
Show how transactions in derivatives can be used to either hedge risk or to open speculative
positions.
Derivatives have become popular in response to the increasing volatility and complexity of financial
markets. A diverse range of new financial products have been created to enable market participants
to handle the risks arising from trade in securities and to speculate on future expected movements in
securities prices, without direct trade in the assets themselves. Derivative contract creates a promise
to deliver or trade an underlying product at some time in the future. The contract gives one party a
claim on an ... Show more content on Helpwriting.net ...
If stock prices plunge over this period, the index will fall as well, and so will the futures contract on
the index in response. Amana will profit on its future position, because the future price paid at which
the index is sold will be less than price paid for the index at settlement date.
After a month, the stock market falls as anticipated, and the futures price of the DJIA is at an index
level of 19,000. DJIA futures contract are rated at £10 the DJIA index, so Amana stands to gain.
Sold DJIA futures for 20,000; receives 20,000 times £10 =£200,000 Purchased DJIA futures for
19,000; owes 19,000 times £10 =£190,000 Gain is £200,000 – £190,000 = £10,000
This shows that Amana benefits from selling a DJIA futures contract. Amana has gained from a
market decline, which can partially counterbalance the loss on its existing stock portfolio. However,
to hedge a huge stock of portfolio, Amana would have to take a short position that had a value equal
to the size of its entire stock portfolio.
Options give one party the right, but not the obligation, to buy (or sell) at a set price on an agreed
future date. Future Contracts are a means of avoiding risk but at the cost of eliminating opportunity.
A trader may prefer to hedge risks through options so he can take advantage of an unexpected

Types of Financial Derivative
Futures and Options in India
BY: YOGIN VORA ON MARCH 25, 2010 NO COMMENT * Options Trading * Options Trade *
Derivatives Trade * Trading in shares
The Indian capital market has witness impressive growth and qualitative changes, especially over
the last two decades. In the fifties, sixties and most of the seventies, it was in a dormant stage when
the investors were generally not familiar with, or inclined towards, the corporate securities. During
this time, only few companies accessed the capital market. As a consequence, trading volumes were
low during these years. The process of liberalization of the Indian economy since the early nineties
has contributed to changes in the capital market scenario. The entry of ... Show more content on
Helpwriting.net ...
The Badla system was banned in December 1993 by the market regulator, SEBI, presumably
because it led to excessive speculation and/or its misuse. Based on the recommendations of the G S
Patel committee that the SEBI had set up, a new carry forward trading system was introduced in
January 1996. However, the system did not fond much favour with the broking and investing
community. The revised carry forward system entails a number of restrictions which have made it
unattractive. * Limits on the Carry Forward Transactions * Margins * Limited Carry Forward *
Cumbersome Reporting Requirement
There were voices for relaxations in the stringent conditions laid down in the revised carry forward
scheme from time to time and even demands for reviving the old badla system. The re–introduction
of Badla trading was suggested in some quarters to be key to the revival of the capital market on
account of their deep faith in the ingenuity of the system which simultaneously facilitates hare
financing, share lending and carry forward. * Badla: Operation and Rationale
We may look the modus operandi of badla, which has been prevalent I the Indian markets. Under the
bye–laws of the stock exchanges, a contract in specified shares can be for a. Spot delivery b. For
hand delivery c. For special delivery d. For the settlement
Unless otherwise stipulated, when entering into the contract, a contract

The Control Variables For Investment Derivatives Use
The control variables used in this thesis were selected based on previous literature.
Including the variables that previous researchers have shown to influence firm derivatives use will
improve the explanatory power of the model (Knopf et al., 2002).
3.4.1 Control variable for "CDS model"
Drawing upon the existing literature in derivatives use, CDS use is modeled as a function of CEOs
risk–taking incentives generated by stock options compensation (vega) and the following control
variables: growth opportunities, financial distress (leverage), firm focus (diversification), managers
risk aversion, delta, bank size, and other derivatives.
Growth opportunities are considered by previous studies to affect derivatives use (Smith and Stulz,
... Show more content on Helpwriting.net ...
According to Smith and Stulz (1985), firms that face higher expected costs of financial distress have
larger incentives to use derivatives because derivatives can reduce the present value of bankruptcy
and the probability of financial distress. Firms can use derivatives to reduce the variance of a firm 's
cash flow or earnings which enable firm to have sufficient cash flow to fulfill its fixed payment
obligations and reduce the probability of financial distress (Aretz and Bartram, 2010; Supanvanij
and Strauss, 2010). Similarly to previous studies, I have used leverage as a proxy for financial
distress (e.g., Tufano, 1996; Rogers, 2002; Aretz and Bartram, 2010). Leverage is measured with the
ratio of total debt to book value of assets (e.g., Coles et al; 2006).
I include diversification as a control variable for firm focus. Earlier empirical studies (e.g., Tufano,
1996; Géczy et al., 2007) suggest a negative relationship between the degree of diversification and
derivatives use. Firms can choose to reduce firm risk through changing the level of diversification
(Coles et al., 2006; Bartram et al., 2011). For all the banks in the sample, I collect information on the
degree of diversification which is measured by the number of geographical segments of the firm at
the end of each year (Géczy et al., 1997; Fung et al., 2012). The primary source of data on the
number of segments is Datastream

First Derivatives Of The Approximation For Discontinuous...
1.4.3 Discontinuities in derivatives
Another important class of discontinuities are those in the first derivatives of the approximation.
These discontinuities occur at interfaces between materials and different
13
1.4. APPROXIMATION FOR DISCONTINUOUS FUNCTIONS [? ] phases of materials.
Discontinuities in derivatives of solutions occur wherever the coefficients of the governing partial
differential equation are discontinuous. These discontinuities can easily be handled by standard
finite element approximations by aligning the element edges with the discontinuity. However, if the
discontinuity moves with time, remeshing is required. The approximation given below can model
discontinuities in the derivatives on surfaces (or lines in 2D) which ... Show more content on
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For example, for a vector function u(x), such as a displacement, a discontinuity on f (x) is
introduced by u(x) =åi
Ni(x)
ui+aiH( f (x))

: where ai is a column matrix of the same dimension as ui.
The construction of discontinuities of a single component in a vector function is simplified by the
use of the signed distance function. The unit normal to the line of discontinuity is given by en =
Ñf
kÑf k
:
14
1.5. NUMERICAL EXAMPLE: ONE DIMENSIONAL BI–MATERIAL BAR [? ]
Although a signed distance function should have a unit gradient, we normalize it here since this
should be done in a computation. The tangent plane is then defined by any two unit vectors
orthogonal to en.
We illustrate the construction of the approximation in 2D. The discontinuity in the tangential
component is obtained by letting the displacement field in the elements cut by the discontinuity be
given by u(x) =åi
Ni(x)
ui+aiet(x)H( f (x))

: where et =ezen is a vector in the tangent direction. Only a single parameter is needed at each
node.

1.5 Numerical Example: One dimensional bi–material bar [40]
In this section, the XFEM is illustrated with example involving weak discontinuities
(material interfaces) to introduce the reader

Risk Management : Analysis Of Derivatives
Risk Management
Professor: Henry Silverman
Simran Preet Kaur
Reema Kathuria
FIN 485– (Investment Theory)
This paper talks about risk management, analysis of derivatives in the financial market and how it
affects the decisions of where to invest, whether to buy a particular derivative, mutual funds.
However, it focuses on how to use options in the analysis of derivatives. The word options has many
different meanings, but most of them include the availability or right to choose a certain alternative.
Basically, it is the right, acquired for a consideration, to buy or sell something at a specific price in
future.
Risk Management is a practice that helps in identifying the potential risks in advance, analyze them
and take ... Show more content on Helpwriting.net ...
We can buy a put and sell a put on it. We can buy a call and sell a call on it. Call is a bullish strategy
that we can buy and assuming that the price is going up. Put option is a bearish strategy, which
means that the stock price is going down and individuals can make money. Trading stocks are more
risky than options.
Put Option
The options that gives the right to sell the stock at the specific price, also known as strike price at a
future date.
The put options allows to gain if the stock price falls.
In the portfolio, it protects the portfolio and lock in gains.
Exercise price:–
Price of the contract that is specified for a buyer or a seller.
Also knows as strike price
Option Premium:–
Gains received by the stockholder who sells or writes a contract to another party.
Security's price, life of the option and implied volatility are the factors that affect option premium.
Security Price– If the price of the security is higher, the option premium will be higher and if it is
lower, the option premium is lower. There is a direct relationship between the security price and the
option premium.
Life of the option– The longer the life, higher the premium, shorter the price, shorter the premium.
The chances of change in stock price is higher in the long run as compared to short run.
Implied Volatility– It is the approximate future value of the option and the current value is taken into

consideration.
In our portfolio, we started with the

Calculus C Are Largely Defined By Derivatives Of Vector...
The major topics explored in Calculus C are largely defined by derivatives of vector–valued and
parametrically defined functions, integration by partial fractions, improper integrals, series
convergence (Taylor and Maclaurin), L'Hopitals Rule, and numerous applications. All of the
following topics require a solid foundation in not only Calculus A but also Calculus B.
Vector–valued functions include mathematical functions of one or more variables whose range is
defined as a set of both multidimensional vectors and infinite dimensional vectors. Much of this was
expanded on by Newton and Descartes during the Enlightenment in Europe. Newton largely defined
calculus in his book Principia Mathematica whereas Descartes was the founder of analytic ... Show
more content on Helpwriting.net ...
The derivative of a three–dimensional vector function can be differentiated by using standard
differentiating rules, taught in a standard Calculus A course, as it breaks up the components in the
Cartesian coordinate system.
Integration by partial fractions, or in other words commonly known as the partial derivative of a
vector function, is defined with a commonly used variable a, with respect to the frequently used
scalar variable q. A sub I is the scalar component of a in the direction of e sub i. Sometimes, it is
also called the direction cosine of a and e sub i, but it is also frequently known in most math classes
as the dot product. The vectors e1,e2,e3 form what is known as an orthonormal basis that is
commonly fixed in the reference frame in which the derivative of the partial is being taken. This was
also further expanded on by Newton in the 17th century in his famous book Principia Mathematica
and he often used the notation from Gottfried Leibniz, another 17th century mathematician.
Defined by Isaac Newton and Descartes, in calculus C, another frequently taught topic is what is
known as an improper integral. It is defined as the limit of a definite integral as an endpoint of the
interval or intervals of integration approach either a specified definite real number or infinity or
even in some cases negative infinity. In other cases both endpoints approach limits. Such an integral
is often written symbolically just like a standard definite integral,

A Legislation on Derivative Products: The Chicago Board...
1. SUMMARY:
.
Derivatives are able to eliminate unexpected risks arising from the price volatility of an asset,
however they have often been implicated in the most controversial organisational meltdowns and
financial crises. The evolution underlying assets in derivative products have pushed the development
of legislation to support these changes. The Chicago Board of Trade was the first centralised
derivative trading market, since then the United States regulation on derivatives have served as a
basis from other countries when regulating their markets. The research wants to evaluate the impact
that the changes in the underlying instrument had on regulation. A historiography as a research
methodology is proposed, were a historiographical ... Show more content on Helpwriting.net ...
In this research proposal we will initially begin with a background to the subject where we will
build up a basis to the research problem. An outline of the proposed research question and the
research objectives will be conducted. The Literature studies will serve as a framework for the
construction of the measuring instrument.
3. Background
The first logic of a derivative occurred in the Middle East, 2000 BC, were signs of an option
contract were a document was drawn authorizing the bearer to receive in fifteen days set weight of
lead deposited with the priestesses of the temple (Einzing, 1970). A more familiar derivative is that
in the book of Genesis 29 in the Old Testament, 1700 BC, where Jacob bought an option to marry
Rachel after seven years of labour (Chance, 1998), since then with the development of regulation
and markets for this financial product aided dearly to its popularity. In 1792 to 1750 BC era we
found emergence of a put option contract in the Code of Hammurabi, were in the 48th law were
farmers who had mortgages had to pay interest if they had good harvest but were not obligated to do
so when harvests were bad (Riederova Ruzickova, 2011). 1400 BC saw the emergence of
commercial contracts in Ancient Mesopotamia. Records were engraved on clay tablets arranging the
future delivery of a commodity as stipulated on the

How Derivatives Has Increased Over The Recent Years?
The use of derivatives has increased over the recent years because they are an integral part of the
economy. They help firms to manage financial risks that threaten revenue, cost of goods sold and
various expenses. Derivatives have existed long for centuries and their recorded history dates back
to the sixth century, B.C. (Donohoe, 2015). During this time, goods and services were used in the
exchange, however, this proved to be difficult because it was hard to coordinate harvest times for
different goods all year round. During the 1800s futures were used in the London exchange to
protect against price fluctuations. In this paper, I will examine derivative securities, discuss their
roles in the financial market and discuss the role of ... Show more content on Helpwriting.net ...
OTC derivatives are less liquid than the exchange traded securities as there is no guarantee that
either partner will consent to the trade. More so, it is usually difficult to locate the other party to the
trade. The upside to trading OTC is that the contracts can be customized to suit the customer's needs
because there are fewer restrictions (Foran, Ramanathan, 1976).
It should be noted that the financial crisis of 2008, brought to the realization that OTC derivatives
did not deliver and that to standardize derivative trade was the smart way to go. Regulators, then
started to push for clear trades through well–capitalized clearing houses. Standardization meant that
all market participants traded in limited, uniform set of securities.
Futures Contracts
Futures are defined as an agreement that obligates the buyer to purchase an underlying security at a
specific price in the future (Bodie, et al, 2011). The contracts are standardized and guaranteed by the
exchange clearing house because they trade within secondary markets and also often get settled with
cash (Donohoe, 2015). Futures trading is considered significant for those products whose demand
and actual supply has a lag between such as agricultural and base metal products. A commodity that
is purchased on the delivery date indicates that the trader has taken a long position well as the trader
who commits to delivering the commodity at the maturity date is said to be in the short position

Managing Crude Oil Using Derivatives
MANAGING CRUDE OIL USING DERIVATIVES
The present price markers for crude oil are WTI, Brent and Dubai/Oman. The crude oil derivatives
contracts are traded on the New York Mercantile Exchange (NYMEX). The exchange acts as a
regulatory body and as a financial trading forum for all the parties interested in buying the options.
Members of the exchange carry out the trades themselves, or they act on behalf of the firms they
represent through an open outcry auction held in the trading room or the floor. The procedure begins
when a buyer calls an authorized commodity broker with an order to buy or sell futures or options
contract. This order is sent to the firm's agent who is on the trading floor. The prospects of more
profits increases for the ... Show more content on Helpwriting.net ...
If the price of oil is tripled in a year then the company is able to purchase oil at the last years
locked in price, which is lower than the current price, which in turn helps the company to save a
lot of money (Grabianowski, 2009). But, if the price of oil falls then the company ends up paying
more and loses money.
There are different types of financial instruments available for companies and investors to hedge
against crude oil price volatility. These instruments can be traded financially without the tangible
physical delivery of crude oil and different instruments have different time periods. Some of the
hedging tools are Options, Futures and Swaps. But for this paper we will only focus on option
contracts for management of risk in crude oil trading.
OPTIONS
The modern–day financial options market came into existence in 1973. It was known as the Chicago
Board Options Exchange. During the same year, Fisher Black and Myron Scholes invented a
formula to calculate the price of an option using specific variables. This formula was later called the
Black Scholes Pricing Model and it had a huge impact on investors as they became confident about
the idea of trading options. As of today there are thousands of option instruments (stocks, bonds and
currency) listed in the market and millions of them are traded every day.
Options offer extra flexibility to buyers for managing currency or price risk as they work like an
insurance policy. Call option and Put option

Essay Derivatives Users in Pakistan
DERIVATIVES IN PAKISTAN
In the year of 2001, the derivative products of equity of Pakistan were started in the Stock Exchange
of Karachi. In the start of this launching, a single stock of futures was brought for introduction
which was deliverable for just one month. It has almost nine years passed after that but this stock
market is not considered as much as developed when it is compared to Indian market. The derivates
related to finance, and which were traded in terms of exchange were initially started in Bombay
Stock market and National Stock Market of India in the year of 2000's June. Some of the futures
related to index which were based on BSE Sensitive Index (Sensex) and SP CNX Nifty Index
(Nifty) were started in very first phase. ... Show more content on Helpwriting.net ...
PRODUCTS IN PAKISTAN
Market Review, Product–Line History
Product Settlement Basis Since
Ready Market Initially on T+3. Now settles on T+2 basis 2001
Deliverable Futures 30 days 2001
Cash Settled Futures 30, 60 90 days contract 2007
COT (Stopped in 2006) 22 days 1994
CFS (Replaced COT) and discontinued in May 2009 22 days 2005
Stock Index Futures 90 days contract 2008
7 Days Cash Settled Futures 7 days 2010
Derivatives Users in Pakistan:
In Pakistan, many banks and financial institutions and development investment funds and non–bank
financial institutions deal and trade in the market of the derivatives. However, the use differentiates
as per the nature of the organization. The funds of the general public and theory work are managed
by the mutual funds and are supervised by the trustees. The main way of working of these funds is

The Effect of Derivatives Usage on Firm Value and Performance
The Effect of Derivatives Usage on Firm Value and Performance:
The Study on Malaysian Publicly Listed Firms Between 2008 and 2012
An undergraduate thesis proposal
Presented to the Accountancy Department
De La Salle University
2401 Taft Avenue, Manila, Philippines
in partial completion of the course requirements of
Bachelor of Science in Accountancy
Camposagrado, Raphael Luis C. de Vera, Jan Neil P.
Garcia, Carlos Oliver G.
De La Salle University
August 2013
Table of Contents
CHAPTER 1 – THE RESEARCH PROBLEM 7 1.1 Background of the Study 7 1.2 Statement of the
Problem 9 1.3 Objectives of the Study 9 1.4 Conceptual/Theoretical Framework 10 1.4.1 Rational
Expectations Theory ... Show more content on Helpwriting.net ...
Despite the realized dangers, each actual dollar value of derivatives at present supports between $35
and $70 of notional value. This means that minimal losses from the face value would suffice to
destroy even the best–capitalized derivatives traders (Sivy, 2013). Now, Asian economies begin to
tap into the wealth of opportunities provided by derivative transactions as well. Singapore and
Malaysia are leaders in the region with dedicated derivatives exchanges through the Singapore
Exchange and the Bursa Malaysia respectively. These exchanges facilitate the increase of
derivatives transactions with the SGX's derivatives daily average volume growing 59% year–on–
year during 2011 (JCN Newswire, 2013). Figure 1 illustrates the trend in volume of the derivatives
exchange in terms of the number of contracts.
Figure 1. Movement of average daily derivative contracts traded on the Bursa Malaysia from 2004–
2012 (Source: AmResearch)

As these established exchanges continue to prosper, neighboring developing countries such as the
Philippines are also beginning to consider the creation of fully operational exchanges. With steady
growth maintained at around 6% during 2013 (Magtulis, 2013), Philippine sectors such as in finance
continue to welcome new innovations. For the financial sector, this means the introduction of new
financial instruments.
This research paper is one of the first steps in understanding the

Impact of Derivative Trading on the Volatility in the...
Impact of derivative trading on the volatility in the stock market of India
–Abhinav Barik
Abstract
This research paper focuses on the impact the derivative trading has had on the stock market of
India. The impact is judged by the change in the volatility after the introduction of the derivative
trading. In this paper 5 stocks are taken on which derivative trading was introduced and 4 stocks on
which derivative trading was not introduced. The daily closing price of those stocks was taken for
two periodspre derivative period and the post derivative period. These were analyzed using GARCH
model to find the variance equation and then the GARCH coefficients from this equation were
compared using the Wald test to check if the volatility ... Show more content on Helpwriting.net ...
Author– Sangeeta Wats
In this paper the author examines whether there is any probable implication of derivatives expiration
for the underlying spot market volatility. The GARCH (1,1) results show that for the entire period
the derivative expiration days/weeks are the significant factors that affect the volatility of the spot
market.
2.6 The Temporal relationship between derivatives trading and spot market volatility in the U.K. :
Emperical analysis and Monte Carlo Evidence. Authors– Kyriacos Kyriacaou and Lucio Sarno
In this paper the authors examine the relationship between spot market volatility, future trading and
options trading. The result obtained suggests that futures trading and options trading are found to
affect the spot market volatility but in the reverse direction.
2.7 The effect of derivative trading on volatility of the underlying asset: evidence from the greek
stock market. Authors– Evangelos Drimbetas, Nikolaos Sariannidis and Nicos Porfiris
In this paper the effect of the introduction of the futures and options into FTSE/ASE 20 INDEX on
the volatility of the underlying index has been studied. The results show that the volatility in the has
decreased indicating that the market has become more efficient.
2.8 Impact of derivative trading on stock market volatility in India: A study of SP CNX Nifty.
Authors– Ruchika Gahlot, Saroj K. Datta, and Sheeba Kapil

In this

The Counter Derivatives : Hedging Or Creating Risk?
Dissertation Topic:
?Over the Counter Derivatives: Hedging or creating risk? Evaluation of EU regulation in an effort to
control the risks in OTC Derivatives transactions?
Word Count:
Introduction
Derivatives are products of financial innovation, whose function is take place in the Liberal
Economies of the developed and developing world. Especially nowadays, the use of those financial
instruments tends to be excessive, as their multifarious functionality can serve institutional investor?
s different financial needs. In the financial sector, derivative is defined as a contract whose value is
derived from the value of an underlying asset.[footnoteRef:1] Derivatives contracts are agreements
between two parties who have a deal upon a specific asset. Derivatives are the most innovative and
flexible financial instruments, as their application is addressed to market players who need to reduce
risk, since they provide a means for shifting risk from one party to another that is willing or better
able to monitor that risk.[footnoteRef:2] [1: Michael Chui, Derivatives markets, products and
participants: an overview (2012), IFC Bulletin No 35, Bank of International of International
Settlements, p 1 ] [2: Alan N. Rechtschaffen and Jean Claude Trichet, Capital Markets, Derivatives
and the Law: Evolution After Crisis, Derivative, 2nd edn, Oxford University Press (2014), 2 ]
There are two categories of derivatives. Those that are traded on an exchange and those

Derivatives
Equity Derivative Strategies
Equity Derivative Strategies
Joanne M. Hill Vice President, Equity Derivatives Goldman, Sachs Company
Understanding the tax implications of equity derivatives and the application of these instruments for
taxable U.S. clients is a challenge worth meeting. Equity derivatives can playa useful role in
implementing tax–efficient strategies that maximize after–tax returns. The key is to understand the
costs, benefits, and rules for applying each instrument or strategy and then to select the best
instrument to accomplish the investor's objectives and minimize the taxes.
istorically, u.s. trust departments that managed money for taxable investors were restricted in their
use of derivative securities. ... Show more content on Helpwriting.net ...
First, the investor's holding period is either suspended or terminated, which is not necessarily a bad
thing if the investor already has long–term capital gains. Second, and most troublesome, is the
inability to deduct losses to the extent that the investor has an unrecognized gain. Also, financing
charges for straddle positions are not deductible. Instead, for the investor in a straddle situation, the
charges are capitalized into the cost basis of the long position. Finally, corporations lose the 70
percent deduction on all qualified dividends for stocks that are part of straddle positions. Only in a
few circumstances would a company want to do something that would constitute a straddle;
corporations should generally avoid straddles. Stock Option Transactions. The premium received or
paid for stock option transactions is considered a capital item. When a physically settled stock
option is exercised or unassigned, the cost basis or sale price can be adjusted by the premium
received or paid. Stock options, with the exception of listed index options, are generally not marked
to market at year end for tax purposes. The tax treatment of stock options depends on the time to
expiration, the type of option, and how it is exercised or assigned. Short–dated options. Profits on
short–dated options are generally considered short–term capital gains, but losses may be considered
long term if

Advantages And Disadvantages Of Derivatives
Derivatives are financial contracts whose price is either linked to the price of an underlying asset,
commodity, rate, index or the occurrence or significance of a certain event. The phrase derivative
originated from how the price of these contracts is derived from the price of some underlying
commodity, security or index or the magnitude of an event. The set of financial instruments that
include futures, forwards, options and swaps are referred to by the term Derivative. A derivative can
be combined with a security or loan which will be then called a hybrid instrument or alternatively a
structured security and structured financing. (Dodd, R., 2002).
Derivatives trading take place in two markets, the over–the counter–market (OTC) and the
organized derivative exchange markets. Contrary to the OTC markets that allow derivatives
contracts to be individually customized to the risk ... Show more content on Helpwriting.net ...
Therefore, derivatives are traded separately from spot market. Derivatives are not always simple and
straightforward. There are some derivatives that their characteristics and features are difficult to
understand. These derivatives are called exotic derivatives, which include barrier option, which is
a type of option that its exercise depends on whether the price reaches a barrier level in the maturity
date and it has a lower premium than that of the ordinary option (Hull 2003: 439), caput, which is an
option to buy a put, cacall, which is an option to buy a call, and contingent premium option, which
is a type of option that its premium payment is postponed till the maturity date and its premium is
higher than that of ordinary options, if the option is in–the–money at the expiration date so the
premium will be paid, but in the case of out– and at–the–money, the premium will not be paid. Any
small change in the price of the underlying asset may cause a huge change in the derivative's price
(Federal Reserve Bank of Boston 2002:

Berkshire Hathaway Derivatives
make sports bets like this so it should come as no surprise that derivatives are so popular since many
of the same people who work in Wall Street are betting at sports books.
The Oracle of Omaha weighs in
Warren Buffet is unquestionably one of the most admired and successful investors in the world. He
is also the richest so his opinions carry some weight. Here is what he said about derivatives in the
annual report of his securities firm, Berkshire Hathaway in 2002. I view derivatives as time bombs,
both for the parties that deal in them and the economic system. He also called them financial
instruments of mass destruction.
Charlie Munger, Buffet's long–time partner at Berkshire Hathaway is even more outspoken. In a
2014 interview with Forbes ... Show more content on Helpwriting.net ...
Large swings in stock and commodity prices can happen in minutes and trigger an instant
requirement for cash liquidity that could become the stock market tipping point. Derivatives are
believed to have played a large role in 2008 when the phony valuations of mortgage–backed
securities (a derivative) helped trigger the largest market crash in history up to that date.
What is different today? In 2015, the stock market rose 20% higher than its 2008 peak while the
derivatives exposure of the top 9 banks over the same period has risen at 40%–twice that rate from
$160 trillion to more than $228 trillion. Over the past couple of decades, the derivatives market has
multiplied in size because it is one of the few areas the government has not heavily regulated.
Everything is going to remain fine as long as the system stays in balance. But when markets become
rapidly unstable, we could witness a string of financial crashes that no government on earth will be
able to

Regulation Of Otc Derivatives : Guidelines
Regulation of OTC Derivatives Table of Contents Executive Summary Introduction Development
of OTC Legalization Reintroducing OTC Regulations The Effects of Regulations Lessons to the
OTC Derivative Sector Conclusion Works Cited  Executive Summary The financial sector has
used derivatives for several years. Governments have hence developed regulations to manage the
economic instrument. The United States government controls the derivative market through federal
agencies; for example, the Security Exchange Commission. The derivative laws aim at enhancing
the transparency of the financial sector. This is through increased monitoring and usage of
designated contract markets. The derivative laws have changed the market structure because of trade
restrictions and exit of banks from the market. The Dodd–Frank Act should be implemented
internationally to hinder instability in the global financial sector. Introduction Financial derivatives
have existed in some form for hundreds of years, the oldest example involves a greek philosopher
and the production of olive oil. With the widespread use of these instruments governments across
the world have developed regulations and laws to control derivative markets. In the early years the
US regulated derivatives using the Rule against difference contracts under common law. (Stout
31) These rules did not stop someone from wagering on something using a contract, but added
requirements

Disadvantages Of Derivative Contracts
DERIVATIVE is a transaction or contract whose value depends on or, as the name implies, derives
from the value of underlying assets such as stock, bonds, mortgages, market indices, or foreign
currencies. One party with exposure to unwanted risk can pass some or all of the risk to a second
party. The first party can assume a different risk from a second party, pay the second party to assume
the risk, or, as is often the case, create a combination. Derivatives are normally used to control
exposure or risk.
DERIVATIVE CONTRACT is, generally, a financial contract the value of which is derived from the
values of one or more underlying assets, reference rates, or indices of asset values, or credit–related
events. Derivative contracts include interest rate, foreign exchange rate, equity, precious metals,
commodity, and credit contracts, and any other instruments that pose similar risks. ... Show more
content on Helpwriting.net ...
Put and call options are ubiquitous in modern investment agreements, such as those involving joint
ventures as well as private equity and venture capital investments. The enforceability of put and call
options in Indian companies has been the subject matter of debate due to the existence of stringent
securities legislation that has been supported by strict judicial interpretation. Moreover,
pronouncements by India's securities regulator, the Securities and Exchange Board of India, have
expressly disallowed options in securities of Indian companies (except private

Risk Management through Derivatives in India
Evolution:
With the globalization of trade and free movement of financial assets, risk management through
derivatives became a necessity in India. In the early nineties in India the economic liberalization
provided the economic rationale for the introduction of forex derivatives. Many business houses
actively approached foreign markets not only with their products but also as a source of capital and
direct investment opportunities. In 1993 there was limited convertibility on the trade account so the
environment became more conducive for the introduction of these hedge products. The development
in the forex derivative market was carried parallel along with the steps taken to reform the Indian
financial market. In 1992 FII's were allowed to invest in Indian equity and debt markets and in the
following year foreign brokerage firms were allowed to operate in India. NRIs (non–resident
Indians) and OCBs (Overseas Corporate Bodies) were allowed to hold together around 24% of the
paid–up capital of the Indian companies and it was further raised to 40% in 1998. The Indian
companies were encouraged to issue ADRs/GDRs in 1992 to raise foreign equity. An Indian entity
was allowed to make investments in overseas joint ventures and wholly owned subsidiaries to a
limit of US$ 100 million during one financial year. Investments in Nepal and Bhutan were allowed
to a limit of INR 3.5 billion in one financial year. Companies located in Special Economic Zones
can invest out of their balances

Credit Derivatives in the Recent Global Financial Crisis
Credit Derivatives in the recent Global Financial Crisis 1.0 Introduction: In the recent times credit
derivatives have become a very popular financial security for investors. If we take a look at the chart
given below we can see how the popularity of credit derivatives increased in the past decade. The
maximum volume of derivatives was traded during the years 2005 to 2007 of which 2006 was the
highest at $2000bn. Then when the financial crisis occurred at the end of 2007 the trading decreased
rapidly the following two years to as low as $100bn in 2009. There has been claims from financial
critics that these credit derivative are the main factor that has lead to the almost collapse of the
world financial markets and if corrective measures ... Show more content on Helpwriting.net ...
3.0 Why control measures are necessary? From the simple description of what happened during the
financial crisis as mentioned above, it is clear that the use or rather the overuse of credit derivatives
was the major cause of the collapse of the financial market. The creatively designed derivatives
helped to hedge the risks off parties involved and eventually the party held accountable for the risk
would get lost in all the complexity of each tranche. In May 2010, the Financial Times quoted
Warren Buffett with the following: Derivatives are financial weapons of mass destruction, carrying
dangers that, while now latent, are potentially lethal to the financial system (Lemer, 2010). This
quote nicely reflects the fear of some market participants and observers that credit derivatives may
threaten the stability of the financial system. The transactions of credit derivatives are not required
to be disclosed by the market participants and this opaqueness in the system can easily lead to yet
another collapse in the financial markets. Furthermore, there is no common method of
documentation and thus control measures are only self–regulatory (Ayadi Behr, 2009). Sometimes
government heavily subsidizes the derivative markets making it easier for anyone to get credit
derivatives cheaply. Almost one–third of OTC market trades require no margin or collateral
requirements at all. Financial innovation has a bad reputation at the moment, because exotic
derivatives were one of

Ic: Show How Transactions In Derivative Instruments Can
ic: Show how transactions in derivative instruments can be used to either hedge risks or to open
speculative positions.
1. Introduction
The latest global financial crisis, starting from the United States since 2007, has pushed the financial
derivatives to be a hot spot. The publics usually believe that the inappropriate application of
derivatives should be to blame for this, which is totally wrong. It is apparent that there is no single
financial crisis resulting from only a kind of financial product. Whatever the instrument is, including
credit derivatives and basic derivatives, they are only the conducting tools holding by the real
culprits. The ultimate cause of this financial crisis is the imbalance of the global economy, or in
other ... Show more content on Helpwriting.net ...
① Forwards
A forward contract is an agreement to buy or sell an asset at a certain future time for a certain
price (Hull, 2011). Unlike a spot contract, it does not exercise immediately after writing. This kind
of derivatives is traded in the over–the–counter market. After entering into contract, time passes by,
price of the underlying asset may change, interest rate may change, so the market price of the
forward contract most likely will change. The market price of the forward contract is therefore
variable, but the contract 's delivery price is always the same. As to a forwards, both parties have an
obligation to execute the contract at the maturity and since forwards does not require any outlay to
enter, the total payoff from the contract is exactly equal to the total profit or loss of the investor from
the contract.
Most holders of forwards are usually hedgers who is facing potential risks. Since that, they want to
use the forwards contracts to avoid the adverse price movements in the future and offset the risk
exposure as much as possible. However, speculators are willing to take some risks in the markets for
potential equivalent return. Usually, they use derivatives to bet on the future direction of movements
in the price and mostly, their counter–party is hedger, due to their exactly different expectations of
price movements. Say a shareholder is worrying about the stock price falling so he can conduct a
short hedge to avoid unexpected movements of price

About Nse Derivatives
Frequently Asked Questions on Derivatives Trading
At NSE
NATIONAL STOCK EXCHANGE OF INDIA LIMITED
Derivatives Trading
QUESTIONS ANSWERS
1.
What are derivatives?
Derivatives, such as futures or options, are financial contracts which derive their value from a spot
price, which is called the
underlying. For example, wheat farmers may wish to enter into a contract to sell their harvest at a
future date to eliminate the risk of a change in prices by that date. Such a transaction would take
place through a forward or futures market. This market is the
derivatives market, and the prices of this market would be driven by the spot market price of
wheat which is the underlying. The term contracts is often applied ... Show more content on
Helpwriting.net ...
All the futures contracts are settled in cash at NSE.
Options : An Option is a contract which gives the right, but not an obligation, to buy or sell the
underlying at a stated date and at a stated price. While a buyer of an option pays the premium and
buys the right to exercise his option, the writer of an option is the one who receives the option
premium and therefore obliged to sell/buy the asset if the buyer exercises it on him.
Options are of two types – Calls and Puts options :
Calls give the buyer the right but not the obligation to buy a given quantity of the underlying
asset, at a given price on or before a given future date.
Puts give the buyer the right, but not the obligation to sell a given quantity of underlying asset at a
given price on or before a given future date. All the options contracts are settled in cash.
Further the Options are classiﬁed based on type of exercise. At present the Exercise style can be
European or American.
American Option – American options are options contracts that can be exercised at any time upto
the expiration date. Options on individual securities available at NSE are American type of options.
European Options – European options are options that can be exercised only on the expiration

Binary Trading And Binary Derivatives
In this paper, you will learn about binary Trading. I will discuss what is binary trading, and how it 's
done. How it differs from regular stock market trading. The technological aspect of it. Then lastly
where it 's at now.
Binary Trading is the trading of Binary Options. Binary Options are a type option where the payoff
depends on both the price levels of the strike and the underlying asset, like standard options. If you
have a Binary Option contract you are saying that the market price of the item you are investing in is
higher than the strike price,and the market price does go above the strike price. Then you are in the
moneyor True . The buyer of the contract would receive a fixed payout amount per contract. If it
does ... Show more content on Helpwriting.net ...
Binary Options are so much different than day trading on the stock market. It offers flexibility. The
three primary differences are expiration time, payout, and how it is executed.
First , the expiration time is a big difference. Binary options can be made to be short term as short as
a one hour expiration time. This means that with multiple expiration times investors can make an
instant profit on their binary options and can become more flexible in their option investments. The
expiration times can be weekly, monthly,or even longer terms.
Secondly, the payouts are different than day trading. With regular day trading, an investor pays per
contract. Subsequently, the investor will profit or lose an amount depending on the number of points
difference between the expiration level and the strike price. In binary options the win or lose
outcome is set ahead of time. The investor knows how much he or she is going to win or lose before
they enter the trade. This can be a serious edge in regular day trading.
Third, expiration is different between binary options and regular day trading. The investor has to
hold onto his binary option until the agreed upon expiration time. This means that when looking and
purchasing options contracts he cannot sell them once they are purchased. Although there are some
brokers who do allow the selling of contracts once they have been purchased.
Furthermore, You need at least

The Risks Caused By Foreign Currency Derivatives On The...
Nestlé S.A. is a Swiss company and owns a prestigious position being the world's leading nutrition,
health and wellness group (Nestlé, 2016). According to its annual report (2015), this company is
exposed to many risks caused by movements in foreign currency exchange rates, interest rate and
market prices. The foreign exchange risk comes from transactions and translations of foreign
operations in Swiss Francs (CHF). The interest rate risk faces the borrowings at fixed and variable
rates. The market price risk comes from commodity price and equity price. The former risk arises
from world commodity market for the supplies of coffee, cocoa beans, sugar and others. The later
risk arises from the fluctuations of the prices of investments held. (Nestle annual reports, 2015).
Thus, financial derivatives instruments are used by this multinational corporation in order to hedge
these risks.
Moreover, because of the huge worldwide extension of the corporation, which operates in 194
countries, the use of foreign currency derivatives to minimize the earnings volatility would be the
subject of later analysis. The report will focus on how Nestlé uses futures and option contracts to
hedge its exposure to currency risk, centering our attention in Nestlé Home Currency, the Swiss
Franc in relation to the US Dollar (USD/CHF). It will be examined an example of its hedging
strategy and the information provided by a contact in the firm.
2. Currency risk: USD/CHF

Derivatives
DERIVATIVES RISK MANAGEMENT ASSIGNMENT – II
By: ATTIKA RAJ, ROLL NO: MS10A009, MBA– 2012 BATCH, DOMS, IITM
2/21/2012
I. Case Analysis – Risk management Policy of Lufthansa Submitted in Assignment 1
II.
Case Analysis: Commodity Market Derivatives
Case Solutions: 1. Discuss the risk exposure of Amarnath hedge fund. Ans: The Amaranth hedge
fund was exposed to following risks: a. Market risk: The risk that occurs from the volatility of
investment returns b. Liquidity risk: It measures the degree of difficulty in exiting a given trading
position c. Funding risk: It measures the extent to which they were able to meet margin calls on their
natural gas position d. Capacity risk: The risk due to putting too much money into one ... Show more
content on Helpwriting.net ...
Exercise (assignment) will result in the delivery (payment) of cash on the business day following
expiration.
  
b. Eligible for market offset against conventional options on the same underlying index if some
conditions are met. c. Eligible for portfolio margin accounts. d. Offers unique price discovery
mechanism through competitive auction process which is not obligatory on the participants. e.
Offers price transparency f. All FLEX options are quoted publicly daily. Quotations are easily
accessible via standard quote systems like Bloomberg or Reuters g. Lower liquidity risk as there is a
secondary market h. Low counterparty risk i. FLEX option offer, like over–the–counter options, the
benefit of fine–tuning option strategies according to some target trading objectives. Example to
create zero–cost collars, synthetic positions with lower market impacts. 3
Risks associated in terms of trading FLEX options are: a. Highly volatile: As it expires on almost
any day, therefore, the volatility brought by the scramble can happen anytime to avoid loss or to
solidify gains. Thus prices move at any time. b. Unpredictable ramifications: when market is bullish

participants gain and hence do not complain but if market is bearish, losses made by the players
could be huge leading to breakdown in the system. c. Not fungible with standard listed index d. The
expiration date cannot be the 3rd Friday of the month or two–business days date

History and Classfication of Derivatives Essay
Classification of Derivatives: Derivatives are classified in terms of their payoffs and as exchange
traded and over the counters.
Linear Derivatives: Linear Derivatives have linear payoff. E.g. Futures and forwards.
Non Linear Derivatives: Non Linear Derivatives have non linear payoffs. E.g. Options.
Exchange traded: These are standardized instruments and are backed by clearing house. So there is
no default risk. E.g. Futures.
Over the counters: Over the counters are customized contracts and they bare default risk. E.g. Swaps
and Forwards.
Histroy:
The history of derivatives is quite colorful and surprisingly a lot longer than most people think.
Derivatives were first instruments ... Show more content on Helpwriting.net ...
In 1938: (FNMA) created to buy FHA mortgages and promote housing. In 1968: Creation of
(GNMA) to buy FHA mortgages was made. In 1970: (FHLMC) (Freddie Mac). In 1968: GNMA
guarantees first mortgage pass–through (MBS). In 1977: First private–label mortgages issued by
Bank of America. In 1983: first Collateralized Mortgage Obligation issue by Freddie Mac. In 1984:
Secondary Mortgage Enhancement Act was made.
Interest rate derivatives in the 1990's and beyond:
Development of LIBOR IR swaps and swaps derivatives occur. Caps and Floors (series of options
on short–term rates) were made. Swaptions (options on swaps) are natural instruments for hedging
(MBS and CMOs).OTC market where dealers trade with dealers and end users like (mortgage
originators or banks). In Mid of 1990's: credit derivatives begin trading on OTC .Credit–default
swaps synthetic bond insurance (mostly for corporate) were also issue. Late in 1990's Collateralized
Debt Obligations was (JPM first large issuer).
The 2000's:
Explosive growth of markets occurs on credit derivatives fueled by low interest rates. In 2007:
Subprime Crisis occurs. In which non–performance of mortgages on the sub–prime sector starts.
Failure of several CDOs and Special Purpose Vehicles. Bankruptcy of mortgage originators was one
of the main reasons. Collapse of private label market (subprime market and Alt–A) also occur.
Investors withdraw completely from the

What Are The Advantages And Disadvantages Of Derivatives
Derivative is a financial instrument whose value is derived from underlying asset. The underlying
may be shares, commodities, indices such as NSE and BSE sensexs and even consumer price index.
In case of common stocks (shares) the investors can purchase equity derived securities representing
a claim i.e an option on a particular stock on certain index.
What is important to understand is that derivatives are not products that can be sold accordingly ,
they are contracts made on the basis of the value of the actual products. This mean when the value
of the assest or the product on which the derivative is based on changes, so does the value of the
derivative change. Recently , option on weather condition and ... Show more content on
Helpwriting.net ...
Suppose an Investor is bullish on Reliance at the start of the current month when the spot price is
Rs1000/=. He is expecting a price of Rs1150/= by the end of expiry . Although he is expecting an
upward price movement , he want to limit his downside risk and hence he buys Call option contract
of Rs1000/= (strike price) for a price of say Rs25/=(premium). By paying Rs25/= ,he gets is a right
(not an obligation) to buy Reliance at any time before the expiry at Rs1000/=, irrespective of cash
market price. Hence the cost of his right is Rs1025/= and now before expiry suppose Reliance
moves to Rs1125/= he makes Rs125/= on an investment of Rs25/=. Now if Reliance moves down to
Rs900/=, he will not exercise his right to buy at Rs1000/= and his loss will not be Rs100/= but
maximum of Rs25/= which is loss of very low. Thus options in a way, are like an insurance contract
where by paying certain premium, option buyer passes his risks to option

Derivative and Graph
CALCULATOR SECTION
1. For find at the point (3, 4) on the curve.
A. B. C. D. E.
2. Suppose silver is being extracted from a mine at a rate given by , A(t) is measured in tons of silver
and t in years from the opening of the mine.
Which is an expression for the amount of silver extracted from the mine in the first 5 years of its
opening?
A. B. C. D. E.
3. Joe Student 's calculus test grades (G) are changing at the rate of 2 points per month. Which is the
expression that says this?
A. B. C. D. E.
4. If f is a continuous and differentiable function, then approximate the ... Show more content on
Helpwriting.net ...
A. Points A and B B. Points A and D C. Points B and D D. Points B and C E. Points A and C
18.
The graph of is shown above, on the interval [ –5, 5] . Which is true?
A. The graph is continuous and differentiable. B. The graph is continuous but not differentiable. C.
The graph is not continuous but is differentiable. D. The graph is not continuous nor differentiable.
19. Graph in the plane above, over the window [–1, 8] X [–25, 25].
20. Give the x–interval(s) where the graph of g is increasing. GIVE A REASON for your answer.
21. Give the x–interval(s) where the graph of g is concave up. GIVE A REASON for your answer.

22. Give the x–coordinates of any critical points for the graph of g. For each tell if it is a relative
maximum, a relative minimum or neither. EXPLAIN.
23. Give the x–coordinate of any points of inflection of the graph of g.
24. If is the velocity function for a particle moving along the x–axis, for time seconds, tell ...
A. when the particle changes direction. for .
B. for what intervals of time () the particle is moving to the left.
C. for what intervals of time

Derivatives and Risk Management
CHAPTER 24
DERIVATIVES AND RISK MANAGEMENT
Please see the preface for information on the AACSB letter indicators (F, M, etc.) on the subject
lines.
True/False
Easy:
(24.1) Risk management FP Answer: a EASY
1. One objective of risk management can be to reduce the volatility of a firm's cash flows.
a. True
b. False
(24.4) Swaps FP Answer: b EASY
2. Interest rate swaps allow a firm to exchange fixed for floating–rate payments, but a swap cannot
reduce actual net interest expenses.
a. True
b. False
(24.5) Speculative versus pure risk FP Answer: a EASY
3. Speculative risks are symmetrical in the sense that they offer the chance of a gain as well as a
loss, while pure risks are those that ... Show more content on Helpwriting.net ...
a. Entering into an interest rate swap where the bank receives a fixed payment stream, and in return
agrees to make payments that float with market interest rates.
b. Purchase principal only (PO) strips that decline in value whenever interest rates rise.
c. Enter into a short hedge where the bank agrees to sell interest rate futures.
d. Sell some of the bank's floating–rate loans and use the proceeds to make fixed–rate loans.
e. Buying inverse floaters.
Multiple Choice: Problems

Medium:
(24.4) Swaps–nonalgorithmic CP Answer: b MEDIUM
11. Company A can issue floating–rate debt at LIBOR + 1% and can issue fixed rate debt at 9%.
Company B can issue floating–rate debt at LIBOR + 1.5% and can issue fixed–rate debt at 9.4%.
Suppose A issues floating–rate debt and B issues fixed–rate debt, after which they engage in the
following swap: A will make a fixed 7.95% payment to B, and B will make a floating–rate payment
equal to LIBOR to A. What are the resulting net payments of A and B?
a. A pays a fixed rate of 9%, B pays LIBOR + 1.5%.
b. A pays a fixed rate of 8.95%, B pays LIBOR + 1.45%.
c. A pays LIBOR plus 1%, B pays a fixed rate of 9.4%.
d. A pays a fixed rate of 7.95%, B pays LIBOR.
e. None of the above answers is correct.
(24.6) Treasury bond futures contracts CP Answer: c MEDIUM
12. Suppose the September CBOT Treasury bond futures contract has a quoted price of 89'09. What
is the implied annual interest rate inherent in this

Derivative Is A Complex Subject Of Calculus
Derivative is a complex subject of calculus. In calculus, derivative is a key term developed by both
Newton and Leibniz. With function f (t), the first derivative is defined asf^ ' (t)= df/dt= lim┬(h→0)⁡
〖(f(t)–f(t–h))/h〗. There is also a second derivative known as second–order derivative. The
second–order derivative is defined: f^ ' ' (t)= (d^2 f)/(dt^2 )= lim┬(h→0)⁡
〖(f^ ' (t)–f^ ' (t–h))/h〗
=lim┬(h→0)⁡
〖1/h {(f(t)–f(t–h))/h– (f(t–h)–f(t–2h))/h}〗
=lim┬(h→0)⁡
〖(f(t)–2f(t–h)+f(t–2h))/h^2 〗
(Podlubny, 1998). The general idea of derivative has been for several times as the topic has been
dropped and brought up again for further research. Over the years, derivative has been defined in
many algorithms and methods, such as methods for the ... Show more content on Helpwriting.net ...
However, early mathematicians solved these questions with what later became known as derivative.
Derivative has developed or created the ideas of extrema, tangent, and limit (Anderson, Katz, and
Wilson, 2004). Derivative contributed towards the mathematical world from an early stage to the
development of other rules. Derivative was mentioned early in the 1660's to develop new methods
and rules. Many of the methods known today and that have been developed over the years all
derived because of the use of derivative. Derivative supports the evidence of many proofs such as
extreme, tangent, and limit. Newton and Leibniz both saw derivative in a different way. Newton and
Leibniz both created calculus separately, as in Newton and Leibniz were not working together for
the creation of calculus. They both created or invented calculus by the development of derivative.
For example, in the first step of creating calculus, Newton and Leibniz took the idea and concepts of
derivative and integral. The general concepts of derivative and integral came from the methods for
finding tangents, extrema, and area. The general concept of derivative and integral came from the
methods of finding other solutions. Another invention they came across while inventing calculus
was the notation to solve the concepts of derivative and

Financial Derivatives
Financial Derivatives
Various Types and Pricing of Forward Contracts
Contents
1. Introduction.............................................................................................................................3
2.1 Futures...................................................................................................................................4
2.2 Options..................................................................................................................................8
2.3 Swaps...................................................................................................................................10
3. Pricing of Forward ... Show more content on Helpwriting.net ...
It then acts as a party to every trade. In other words it simultaneously acts as if it had sold to the
buyer, and bought from the seller. Following registration, each party has a contractual obligation to
the clearing house. In turn the clearing house guarantees each side of the original bargain.
2.1.4 Margin
Each party to a futures contract must deposit a sum of money known as margin with the clearing
house. Margin payments act as a cushion against potential losses which the parties may suffer from
future adverse price movements.
The potential losses referred to here are those that would arise if one party to the trade defaults on
the agreement. The risk that you default on the agreement to trade may increase if the market moves
against you. For example, if you agree to buy a future and then the price of the underlying asset, and
hence the future, goes down, you face a larger potential loss and consequently may be more likely to
default. The essential feature of a future is that the money changes hand on the delivery date, rather
than on the date that the deal is agreed. However, in practice, clearing houses require a small good
faith deposit – known as margin – to be deposited soon after the deal is agreed. This money is held
by the clearing house. Margin will be much smaller than the value of the underlying asset being
dealt in. As well as being small, margin earns interest so that most traders shouldn't

An Analysis Of The Trading Of Derivatives
Kevin Cone and Madison Schaefer
Professor Nutting
Management 6
December 12, 2014
An Analysis of Trading in Derivatives
12 years ago, Warren Buffett warned that derivatives were financial weapons of mass destruction
(Lenzner). 6 years after he made this statement, derivative traders helped induce the biggest
financial crisis in America since the Great Depression. Derivatives are highly complex financial
instruments that have fundamentally changed the way we perceive finance. Trading these
derivatives has caused a financial revolution that has generated both a huge amount of potential, and
an an equally huge amount of risk. Derivatives, in a nutshell, are highly complex financial
instruments whose values are dependent on, calculated ... Show more content on Helpwriting.net ...
Because companies have the ability to swap an extensive variety of things, swaps are often
overarchingly defined as an exchange in future cash flows (IP). One common type of swap is an
interest rate swap. In this case, a company agrees to swap some or even all of their interest rate
payments with another company. Interest rate swaps can occur because companies with different
backgrounds and reputations will usually generate different credit ratings. These credit ratings often
correspond to differing interest rates charged by lenders. For example, an established and reliable
company may experience a high credit rating and receive a fixed interest rate, while a newer and
more opaque company may experience lower credit ratings and receive a variable interest rate.
These companies can opt to swap interest rate payments if each believes that the opposing party's
interest rate setup will eventually turn out to be more advantageous in the long–run. In effect, these
companies are utilizing a comparative advantage in order to achieve their financial goals.
Another example of a swap is a credit default swap (CDS). By selling CDS contracts, banks offer an
extremely attractive option to people who are lending money to major companies. A credit default
swap contract basically ensures a lender that a bank will financially cover all of his/her losses if
his/her lent credit were to somehow default. The bank will do this in exchange for regular payments

A Brief Note On Financial Derivatives
Financial Derivatives Introduction Derivatives are financial instruments whose values are derived
from the values of other, more basic, entities, known as the underlying assets. For example, the
value of a stock option depends on the price of the relevant stock. Derivatives Markets In the
financial markets derivatives are traded on:  Stocks  Stock indices  Exchange rates  Interest
rates  Bonds  Credit risk  Commodities (such as electricity, wheat, oil) [4] Derivatives are
traded in two different ways – they are traded either on an exchange or over–the–counter (OTC).
The advantage of trading derivatives on an exchange is that the contracts are standardized by the
exchange and credit risk is eliminated. Open–outcry system was used ... Show more content on
Helpwriting.net ...
Answer: Simultaneously buying 100 shares in NY and selling them in London leads to a risk–free
profit of: 100 x [($2.03 x100) – $200] = $300 (ignoring transaction costs) Can this arbitrage
opportunity last for long? Futures A future is an exchange–traded contract between two parties and
the clearinghouse of a futures exchange to buy or sell a commodity whose quantity and quality are
determined in the contract at a specified price on a certain date in the future. [1] When there are
alternatives about what is delivered, where it is delivered, and when it is delivered, the party with
the short position chooses. [4] The clearinghouse responsibility is to ensure for the transaction to be
completed. Futures markets are organized so that the risk of default is completely eliminated. This is
possible by trading futures contracts on an organized exchange with a clearinghouse which steps in
between a buyer and a seller – this means that every trader in the futures markets has obligations
only to the clearinghouse. [1] The party that has agreed to buy the underlying asset has what is
termed a long position The party that

How Weather Derivatives Are Based On Standard Derivative...
Weather derivatives are based on standard derivative structures, such as puts, calls, and swaps.
Fundamental attributes of these structures are: the tick size, which is the payout amount per unit in
the index beyond the strike; the strike, which is the value of the underlying index when the contract
starts to pay–out; and the limit, which is the contract's maximum financial payout.
v. Premium .
The buyer of a weather option pays a premium to the seller that is typically between 10% and 20%
of the notional amount of the contract. It can vary significantly depending on the risk profile of the
contract. Usually there is not an upfront premium associated with swaps.
IV. What is the CME Group?
The Chicago Mercantile Exchange (CME ... Show more content on Helpwriting.net ...
V. Who uses weather derivatives?
Within the larger category of exotic weather derivatives, there are a number of sub–categories that
are utilized by companies who work in various markets. Unsurprisingly, the large companies who
use weather derivatives are those whose businesses are widely affected by the weather on a day–to–
day basis. Therefore, many weather derivative contracts are based on temperature, rainfall, and
snowfall. Demand for sophisticated and flexible OTC products involving these three variables are
growing far more quickly than standardized, exchange–traded contracts. And there are new ideas
and experimental weather derivatives buzzing about the markets, including contracts based on
sunshine and even wind patterns.
Although today energy companies are the biggest users of these trades, there is growing awareness
and signs of potential growth in the trading of weather futures among agricultural firms, renewables,
mining, retail, construction companies, restaurants, and even companies involved in tourism and
travel, like hotels and airlines. The number of markets that could invest in and could benefit from
weather derivatives is endless. Here are some examples of industries and companies that currently
use weather derivatives, the type of weather they hedge on, and the risks they assume:
Figure 1
Risk Holder Risky Weather Type Risk Assumed
Energy Companies

Impact on Derivatives
Reserve Bank of India Occasional Papers Vol. 24, No. 3, Winter 2003
Derivatives and Volatility on Indian Stock Markets
Snehal Bandivadekar and Saurabh Ghosh *
Derivative products like futures and options on Indian stock markets have become important
instruments of price discovery, portfolio diversification and risk hedging in recent times. This paper
studies the impact of introduction of index futures on spot market volatility on both SP CNX Nifty
and BSE Sensex using ARCH/GARCH technique. The empirical analysis points towards a decline
in spot market volatility after the introduction of index futures due to increased impact of recent
news and reduced effect of uncertainty originating from the old news. However, further
investigation ... Show more content on Helpwriting.net ...
Questions pertaining to the impact of derivative trading on cash market volatility have been
empirically addressed in two ways: by comparing cash market volatilities during the pre–and post–
futures/ options trading eras and second, by evaluating the impact of options and futures trading
(generally proxied by trading volume) on the behaviour of cash markets. The literature is, however,
inconclusive on whether introduction of derivative products lead to an increase or decrease in the
spot market volatility. One school of thought argues that the introduction of futures trading increases
the spot market volatility and thereby, destabilises the market (Cox 1976; Figlewski 1981; Stein,
1987). Others argue that the introduction of futures actually reduces the spot market volatility and
thereby, stabilises the market (Powers, 1970; Schwarz and Laatsch, 1991 etc.). The rationale and
findings of these two alternative schools are discussed in detail in this section. The advocates of the
first school perceive derivatives market as a market for speculators. Traders with very little or no
cash or shares can participate in the derivatives market, which is characterised by high risk. Thus, it
is argued that the participation of speculative traders in systems, which allow high

Derivatives Study Guide
1. Both forward and futures contracts are traded on exchanges. : False
2. Futures contracts are standardized; forward contracts are not. : True
3. The Samp;P500 index futures contract is a physical delivery contract. The pork bellies futures
contract is a cash–settled contract. : False
4. An American option can be exercised at any time during its life. : True
5. A put option will always be exercised at maturity if the strike price is greater than the underlying
asset price. : True
6. The fact that the exchange is the counter–party to every futures contract issued is important
because it eliminates interest rate risk. : False
7. Index arbitrage is a strategy which exploits differences between actual index
futures ... Show more content on Helpwriting.net ...
ration
A call option gives the owner the right but not the obligation to buy the underlying asset at a
predetermined price during a predetermined time period
Strike (or exercise) price: the amount paid by the option buyer for the asset if he/she decides to
exercise
Exercise: the act of paying the strike price to buy the asset
Expiration: the date by which the option must be exercised or become worthless
Exercise style: specifies when the option can be exercised
 European–style: can be exercised only at expiration date
 American–style: can be exercised at any time before expiration
 Bermudan–style: can be exercised during specified periods
Payoff/Profit of a Purchased Call
Payoff = Max [0, spot price at expiration – strike price]
Profit = Payoff – future value of option premium
Payoff/profit of a purchased (i.e., long) put
 Payoff = max [0, strike price – spot price at expiration]
 Profit = Payoff – future value of option premium
Put–Call Parity
The net cost of buying the index using options must equal the net cost of buying the index using a
forward contract
Call (K, t) – Put (K, t) = PV (F0,t – K)
 Call (K, t) and Put (K, t) denote the premiums of options with strike price K and time t until
expiration, and PV (F0,t ) is the present value of the forward price

Synthetic security creation using parity
 Synthetic stock: buy call, sell put, lend PV of strike and dividends
 Synthetic T–bill: buy stock, sell call, buy put

Questions On Historical Criticisms Of Derivatives Essay
Introduction Derivatives tend to be an intricate topic in accounting. So to begin, a very basic
understanding of a derivative is that they are a binding contract between two or more parties. The
contract is for a future transaction of some underlying financial asset. The purpose for companies to
implement derivatives are to aid them in managing risk by using a type of financial forwards,
futures, options, or swaps. For example, a forward contract is when Company A believes Company
B's stock price will substantially increase over the next year. However, Company A does not have
the resources to purchase the stock today. Therefore, Company A and B enter a contract for delivery
of 10,000 shares of Company B in one year at an agreed upon price. However, derivatives are
incredibly more exhaustive than the rudimentary illustration above.
Thus, this discussion will examine scholarly articles to provide insight on historical criticisms of
derivatives, why derivatives tend to be a more complicated accounting topic, implications for
auditors and analysts, how FASB is making attempts to simplify derivatives, and lastly, concluding
remarks.
Historical Criticisms When FASB first released the exposure draft for derivatives, it received strong
criticisms. Dolde and Swieringa (1997), shortly after the exposure draft was released, listed some of
the major criticisms. Dolde and Swieringa (1997, 2) noted that, Many...believe that [derivative
standards] are too complex to be understandable,

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