Derivatives - Basics of Derivatives contract covered in this pptSundar B N
Derivatives - Basics of Derivatives including forward, futures, swap and options contracts which covers HISTORY OF DERIVATIVES, CHARACTERISTICS OF DERIVATIVES , FEATURES OF DERIVATIVES, FUNCTIONS OF DERIVATIVES MARKET, USES OF DERIVATIVES, DIFFERENCE BETWEEN SHARES AND DERIVATIVES SHARES DERIVATIVES, DEFINITION OF UNDERLYING ASSET, DERIVATIVES ADVANTAGES AND DISADVANTAGES, PARTICIPANTS/ TRADERS IN DERIVATIVES MARKET, SPECULATORS, ARBITRAGEURS, HEDGER
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Derivatives - Basics of Derivatives contract covered in this pptSundar B N
Derivatives - Basics of Derivatives including forward, futures, swap and options contracts which covers HISTORY OF DERIVATIVES, CHARACTERISTICS OF DERIVATIVES , FEATURES OF DERIVATIVES, FUNCTIONS OF DERIVATIVES MARKET, USES OF DERIVATIVES, DIFFERENCE BETWEEN SHARES AND DERIVATIVES SHARES DERIVATIVES, DEFINITION OF UNDERLYING ASSET, DERIVATIVES ADVANTAGES AND DISADVANTAGES, PARTICIPANTS/ TRADERS IN DERIVATIVES MARKET, SPECULATORS, ARBITRAGEURS, HEDGER
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The concept of the Security Market Line is very popular for portfolio management. It helps to derive the pricing of risky securities by plotting their expected returns.
To know more about it, click on the link given below:
https://efinancemanagement.com/investment-decisions/security-market-line
The concept of the Security Market Line is very popular for portfolio management. It helps to derive the pricing of risky securities by plotting their expected returns.
To know more about it, click on the link given below:
https://efinancemanagement.com/investment-decisions/security-market-line
The emergence of the market for derivative products, most notably forwards, futures and options, can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices
Describes what derivatives are and explains the differences between over-the-counter and exchange-traded
derivatives, Identify types of underlying assets on which derivatives are based, describes the participants in and use of derivative trading, describes what options are and how they are traded, and evaluate call and put option strategies for
individual and institutional investors and corporations.
5. Describe what forwards are, distinguish futures contracts from forward agreements, and evaluate
futures strategies for investors and corporations, define and describe rights and warrants, explaining why they are issued,
A derivative is a financial security with a value that is reliant upon or derived from an underlying asset or group of assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its price is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
Derivatives can either be traded over-the-counter (OTC) or on an exchange. OTC derivatives constitute the greater proportion of derivatives in existence and are unregulated, whereas derivatives traded on exchanges are standardized. OTC derivatives generally have greater risk for the counterparty than do standardized derivatives.
Describes what derivatives are and explains the differences between over-the-counter and exchange traded derivatives, Identifies types of underlying assets on which derivatives are based, describes participants in and uses of derivative trading, describe what options are and how they are traded, evaluates call and put option strategies for
individual and in-stitutional investors and corporations, describes what forwards are, distinguishing futures contracts from forward agreements, evaluate futures strategies for investors and corporations, Define and describe rights and warrants, explain why they are issued, and calculate the value of rights and warrants
US Economic Outlook - Being Decided - M Capital Group August 2021.pdfpchutichetpong
The U.S. economy is continuing its impressive recovery from the COVID-19 pandemic and not slowing down despite re-occurring bumps. The U.S. savings rate reached its highest ever recorded level at 34% in April 2020 and Americans seem ready to spend. The sectors that had been hurt the most by the pandemic specifically reduced consumer spending, like retail, leisure, hospitality, and travel, are now experiencing massive growth in revenue and job openings.
Could this growth lead to a “Roaring Twenties”? As quickly as the U.S. economy contracted, experiencing a 9.1% drop in economic output relative to the business cycle in Q2 2020, the largest in recorded history, it has rebounded beyond expectations. This surprising growth seems to be fueled by the U.S. government’s aggressive fiscal and monetary policies, and an increase in consumer spending as mobility restrictions are lifted. Unemployment rates between June 2020 and June 2021 decreased by 5.2%, while the demand for labor is increasing, coupled with increasing wages to incentivize Americans to rejoin the labor force. Schools and businesses are expected to fully reopen soon. In parallel, vaccination rates across the country and the world continue to rise, with full vaccination rates of 50% and 14.8% respectively.
However, it is not completely smooth sailing from here. According to M Capital Group, the main risks that threaten the continued growth of the U.S. economy are inflation, unsettled trade relations, and another wave of Covid-19 mutations that could shut down the world again. Have we learned from the past year of COVID-19 and adapted our economy accordingly?
“In order for the U.S. economy to continue growing, whether there is another wave or not, the U.S. needs to focus on diversifying supply chains, supporting business investment, and maintaining consumer spending,” says Grace Feeley, a research analyst at M Capital Group.
While the economic indicators are positive, the risks are coming closer to manifesting and threatening such growth. The new variants spreading throughout the world, Delta, Lambda, and Gamma, are vaccine-resistant and muddy the predictions made about the economy and health of the country. These variants bring back the feeling of uncertainty that has wreaked havoc not only on the stock market but the mindset of people around the world. MCG provides unique insight on how to mitigate these risks to possibly ensure a bright economic future.
Even tho Pi network is not listed on any exchange yet.
Buying/Selling or investing in pi network coins is highly possible through the help of vendors. You can buy from vendors[ buy directly from the pi network miners and resell it]. I will leave the telegram contact of my personal vendor.
@Pi_vendor_247
how can I sell pi coins after successfully completing KYCDOT TECH
Pi coins is not launched yet in any exchange 💱 this means it's not swappable, the current pi displaying on coin market cap is the iou version of pi. And you can learn all about that on my previous post.
RIGHT NOW THE ONLY WAY you can sell pi coins is through verified pi merchants. A pi merchant is someone who buys pi coins and resell them to exchanges and crypto whales. Looking forward to hold massive quantities of pi coins before the mainnet launch.
This is because pi network is not doing any pre-sale or ico offerings, the only way to get my coins is from buying from miners. So a merchant facilitates the transactions between the miners and these exchanges holding pi.
I and my friends has sold more than 6000 pi coins successfully with this method. I will be happy to share the contact of my personal pi merchant. The one i trade with, if you have your own merchant you can trade with them. For those who are new.
Message: @Pi_vendor_247 on telegram.
I wouldn't advise you selling all percentage of the pi coins. Leave at least a before so its a win win during open mainnet. Have a nice day pioneers ♥️
#kyc #mainnet #picoins #pi #sellpi #piwallet
#pinetwork
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
Turin Startup Ecosystem 2024 - Ricerca sulle Startup e il Sistema dell'Innov...Quotidiano Piemontese
Turin Startup Ecosystem 2024
Una ricerca de il Club degli Investitori, in collaborazione con ToTeM Torino Tech Map e con il supporto della ESCP Business School e di Growth Capital
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
Introduction to Indian Financial System ()Avanish Goel
The financial system of a country is an important tool for economic development of the country, as it helps in creation of wealth by linking savings with investments.
It facilitates the flow of funds form the households (savers) to business firms (investors) to aid in wealth creation and development of both the parties
what is the future of Pi Network currency.DOT TECH
The future of the Pi cryptocurrency is uncertain, and its success will depend on several factors. Pi is a relatively new cryptocurrency that aims to be user-friendly and accessible to a wide audience. Here are a few key considerations for its future:
Message: @Pi_vendor_247 on telegram if u want to sell PI COINS.
1. Mainnet Launch: As of my last knowledge update in January 2022, Pi was still in the testnet phase. Its success will depend on a successful transition to a mainnet, where actual transactions can take place.
2. User Adoption: Pi's success will be closely tied to user adoption. The more users who join the network and actively participate, the stronger the ecosystem can become.
3. Utility and Use Cases: For a cryptocurrency to thrive, it must offer utility and practical use cases. The Pi team has talked about various applications, including peer-to-peer transactions, smart contracts, and more. The development and implementation of these features will be essential.
4. Regulatory Environment: The regulatory environment for cryptocurrencies is evolving globally. How Pi navigates and complies with regulations in various jurisdictions will significantly impact its future.
5. Technology Development: The Pi network must continue to develop and improve its technology, security, and scalability to compete with established cryptocurrencies.
6. Community Engagement: The Pi community plays a critical role in its future. Engaged users can help build trust and grow the network.
7. Monetization and Sustainability: The Pi team's monetization strategy, such as fees, partnerships, or other revenue sources, will affect its long-term sustainability.
It's essential to approach Pi or any new cryptocurrency with caution and conduct due diligence. Cryptocurrency investments involve risks, and potential rewards can be uncertain. The success and future of Pi will depend on the collective efforts of its team, community, and the broader cryptocurrency market dynamics. It's advisable to stay updated on Pi's development and follow any updates from the official Pi Network website or announcements from the team.
how to sell pi coins effectively (from 50 - 100k pi)DOT TECH
Anywhere in the world, including Africa, America, and Europe, you can sell Pi Network Coins online and receive cash through online payment options.
Pi has not yet been launched on any exchange because we are currently using the confined Mainnet. The planned launch date for Pi is June 28, 2026.
Reselling to investors who want to hold until the mainnet launch in 2026 is currently the sole way to sell.
Consequently, right now. All you need to do is select the right pi network provider.
Who is a pi merchant?
An individual who buys coins from miners on the pi network and resells them to investors hoping to hang onto them until the mainnet is launched is known as a pi merchant.
debuts.
I'll provide you the Telegram username
@Pi_vendor_247
how to sell pi coins in South Korea profitably.DOT TECH
Yes. You can sell your pi network coins in South Korea or any other country, by finding a verified pi merchant
What is a verified pi merchant?
Since pi network is not launched yet on any exchange, the only way you can sell pi coins is by selling to a verified pi merchant, and this is because pi network is not launched yet on any exchange and no pre-sale or ico offerings Is done on pi.
Since there is no pre-sale, the only way exchanges can get pi is by buying from miners. So a pi merchant facilitates these transactions by acting as a bridge for both transactions.
How can i find a pi vendor/merchant?
Well for those who haven't traded with a pi merchant or who don't already have one. I will leave the telegram id of my personal pi merchant who i trade pi with.
Tele gram: @Pi_vendor_247
#pi #sell #nigeria #pinetwork #picoins #sellpi #Nigerian #tradepi #pinetworkcoins #sellmypi
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The unveiling of the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card marks a notable milestone in the Indian financial landscape, showcasing a successful partnership between two leading institutions, Poonawalla Fincorp and IndusInd Bank. This co-branded credit card not only offers users a plethora of benefits but also reflects a commitment to innovation and adaptation. With a focus on providing value-driven and customer-centric solutions, this launch represents more than just a new product—it signifies a step towards redefining the banking experience for millions. Promising convenience, rewards, and a touch of luxury in everyday financial transactions, this collaboration aims to cater to the evolving needs of customers and set new standards in the industry.
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What website can I sell pi coins securely.DOT TECH
Currently there are no website or exchange that allow buying or selling of pi coins..
But you can still easily sell pi coins, by reselling it to exchanges/crypto whales interested in holding thousands of pi coins before the mainnet launch.
Who is a pi merchant?
A pi merchant is someone who buys pi coins from miners and resell to these crypto whales and holders of pi..
This is because pi network is not doing any pre-sale. The only way exchanges can get pi is by buying from miners and pi merchants stands in between the miners and the exchanges.
How can I sell my pi coins?
Selling pi coins is really easy, but first you need to migrate to mainnet wallet before you can do that. I will leave the telegram contact of my personal pi merchant to trade with.
Tele-gram.
@Pi_vendor_247
2. DERIVATIVES AND RISK MANAGEMENT
The Derivatives Market is meant as the market where exchange of derivatives
takes place. Derivatives are one type of securities whose price is derived from
the underlying assets. And value of these derivatives is determined by the
fluctuations in the underlying assets. These underlying assets are most commonly
stocks, bonds, currencies, interest rates, commodities and market indices. As
Derivatives are merely contracts between two or more parties, anything like
weather data or amount of rain can be used as underlying assets The Derivatives
can be classified as
Types of derivatives
Forward
Futures
Options
Swaps
The Types of Derivative Market
The Derivative Market can be classified as Exchange Traded Derivatives
Market and over the Counter Derivative Market. Exchange Traded Derivatives
are those derivatives which are traded through specialized derivative exchanges
whereas Over the Counter Derivatives are those which are privately traded
between two parties and involves no exchange or intermediary. Swaps, Options
and Forward Contracts are traded in Over the Counter Derivatives Market or OTC
market.
The main participants of OTC market are the Investment Banks, Commercial
Banks, Govt. Sponsored Enterprises and Hedge Funds. The investment banks
markets the derivatives through traders to the clients like hedge funds and the rest.
In the Exchange Traded Derivatives Market or Future Market, exchange acts as the
3. main party and by trading of derivatives actually risks is traded between two
parties. One party who purchases future contract is said to go “long” and the person
who sells the future contract is said to go “short”. The holder of the “long” position
owns the future contract and earns profit from it if the price of the underlying
security goes up in the future. On the contrary, holder of the “short” position is in a
profitable position if the price of the underlying security goes down, as he has
already sold the future contract. So, when a new future contract is introduced, the
total position in the contract is zero as no one is holding that for short or long. The
trading of foreign exchange traded derivatives or the future contracts has emerged
as very important financial activity all over the world just like trading of equity-
linked contracts or commodity contracts. The derivatives whose underlying assets
are credit, energy or metal, have shown a steady growth rate over the years around
the world. Interest rate is the parameter which influences the global trading of
derivatives, the most.
DERIVATIVE MARKET AND FINANCIAL MARKET
Derivatives play a vital role in risk management of both financial and non-financial
institutions. But, in the present world, it has become a rising concern that
derivative market operations may destabilize the efficiency of financial markets. In
today’s world the companies the financial and non-financial firms are using
forward contracts, future contracts, options, swaps and other various combinations
of derivatives to manage risk and to increase returns. It is true that growth of
derivatives market reveal the increasing market demand for risk managing
instruments in the economy. But, the major concern is that, the main components
of Over the Counter (OTC) derivatives are interest rates and currency swaps. So,
the economy will suffer surely if the derivative instruments are misused and if a
major fault takes place in derivatives market.
4. THE OVER- THE- COUNTER DERIVATIVES
The derivatives traded over the counter are known as the over the counter
derivative market. The Over the counter derivative market consists of the
investment banks and include clients like hedge funds, commercial banks,
government sponsored enterprises etc. The products that are traded over the
counter are swaps, forward rate agreements, forward contracts, credit derivatives
etc. Derivatives are basically the financial instruments whose value is a function of
the value of the underlying asset. The participants who enter into the contract do so
when they agree on the exchange rate or the value of some asset to be delivered on
a future date.
DERIVATIVE MARKET EQUITY
The derivative market equity includes the financial instruments such as
futures, options and swaps. The equity derivatives are stocks or stock indices
whose prices depend on the prices of the underlying equity instrument. The equity
derivatives are traded in the futures and options exchanges or in the over the
counter markets. The most common forms of the derivative market equity are the
futures and the options market. The options and futures market Options are
contracts that give the buyer or seller the right and not the obligation to buy or sell
the underlying asset at a fixed price at a future date. The call option gives the
right to buy while the put option gives the right to sell. The buyer of the call
option can gain by an increase in the price of the underlying asset without buying
the underlying asset. Conversely the put option holder benefits from the fall in the
price level of the underlying asset. Contrast to the option market the person who
goes long or short in the futures market is bound to buy or sell the contract at the
specified price and date. Hence the futures contracts are much more
standardized in comparison to the options and hence they are traded in
accredited exchanges.
5. WARRANTS
Unlike the options and the futures which are exchange traded financial instruments,
the warrants are equity derivatives that are traded over the counter. Warrants are
used sometimes to increase the yield of bonds. Warrants are similar to the equity
options but are an exception since they are traded by private parties.
CONVERTIBLE BONDS
Convertible bonds are a combination of bonds and equity. The convertible bonds
provide asset protection, high equity returns and they are of less volatile nature.
The investors in the equity derivative can hedge their risk. The equity derivatives
are also used as a speculative instrument. The derivative market equity traders use
the data on stock and their derivatives. They also need, in addition, the factors that
may affect the equity prices. To analyze the data the equity market traders need
appropriate statistical tools. For further information on derivative market equity,
the following websites need to be looked at equityderivatives.com, reuters.com,
asx.com, amazon.com etc.
FORWARD AND FUTURES CONTRACTS
Fundamentally, Forward and futures contracts have the same function: both
types of contracts allow people to buy or sell a specific type of asset at a
specific time at a given price futures contracts are traded on the exchange,
forwards contracts are traded over- the-counter market. In case of futures contracts
the exchange specifies the standardized features of the Contract, while no pre
determined standards are there in the forward contracts. Exchange provides the
mechanism that gives the two parties a guarantee that the Contract will be honored
whereas there is no surety/guarantee of the trade settlement in case of forward
Contract.
6. A forward Contract is an agreement between two parties to buy or sell an
asset (which can be of any kind) at a pre-agreed future point in time. Therefore, the
trade date and delivery date are separated. It is used to control and hedge risk, for
example currency exposure risk (e.g. forward contracts on USD or EUR) or
commodity prices (e.g. forward contracts on oil). One party agrees to buy, the other
to sell, for a forward price agreed in advance. In a forward transaction, no actual
cash changes hands. If the transaction is collaterised, exchange of margin will take
place according to a pre-agreed rule or schedule. Otherwise no asset of any kind
actually changes hands, until the maturity of the Contract.
The forward price of such a Contract is commonly contrasted with the spot
price, which is the price at which the asset changes hands (on the spot date, usually
next business day). The difference between the spot and the forward price is the
forward premium or forward discount. A standardized forward Contract that is
traded on an exchange is called a futures Contract. In finance, 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 pre-set price. The future
date is called the delivery date or final settlement date. The pre-set price is called
the futures price. The price of the underlying asset on the delivery date is called the
settlement price. The futures price, naturally, converges towards the settlement
price on the delivery date. A futures Contract gives the holder the right and the
obligation to buy or sell, which differs from an options Contract, which gives the
buyer the right, but not the obligation, and the option writer (seller) the obligation,
but not the right. In other words, the owner of an options Contract can exercise (to
buy or sell) on or prior to the pre-determined settlement/expiration date. Both
parties of a "futures Contract” must exercise the Contract (buy or sell) on the
settlement date. To exit the commitment, the holder of a futures position has to sell
his long position or buy back his short position, effectively closing out the futures
7. position and its Contract obligations. Futures contracts, or simply futures, are
exchange traded derivatives. The exchange acts as counterparty on all contracts,
sets margin requirements, etc. While futures and forward contracts are both a
Contract to trade on a future date, key differences include:
Futures are always traded on an exchange, whereas forwards always trade
over-the-counter Futures are highly standardized, whereas each forward is unique
The price at which the Contract is finally settled is different:
Futures are settled at the settlement price fixed on the last trading date of the
Contract (i.e. at the end) Forwards are settled at the forward price agreed on the
trade date (i.e. at the start) The credit risk of futures is much lower than that of
forwards: Traders are not subject to credit risk due to the role played by the
clearing house. The profit or loss on a futures position is exchanged in cash every
day. After this the credit exposure is again zero. The profit or loss on a forward
Contract is only realised at the time of settlement, so the credit exposure can keep
increasing In case of physical delivery, the forward Contract specifies to whom to
make the delivery. The counterparty on a futures Contract is chosen randomly by
the exchange. In a forward there are no cash flows until delivery, whereas in
futures there are margin requirements and periodic margin calls.
8. OPTION/ OPTIONS CONTRACT
Futures Option are an excellent way to trade the futures markets. Many new traders
start by trading futures Option instead of straight futures contracts. There is
generally less risk and volatility when using Option instead of futures. Actually,
many professional traders only trade Option.
FUTURES OPTION
An Option is the right, not the obligation, to buy or sell a futures contract at a
designated strike price. For trading purposes, you buy Option to bet on the price of
a futures contract to go higher or lower. There are two main types of Option - calls
and puts.
Calls – You would buy a call Option if you believe the underlying futures price
will move higher. For example, if you expect corn futures to move higher, you will
want to buy a corn call Option.
Puts – You would buy a put Option if you believe the underlying futures price will
move lower. For example, if you expect soybean futures to move lower, you will
want to buy a soybean put Option.
Premium – You are obviously going to have to pay some kind of price when you
buy an Option. The term used for the price of an Option is premium. You can think
of the pricing of Option as a bet. The bigger the long shot, the less expensive they
will be. Oppositely, the more sure the bet is, the more expensive it will be.
Contract Months (Time) – Option have an expiration date, which means they only
last for a certain period of time. When you buy an Option, you cannot hold it
forever. For example, a December corn call expires in late November. You will
need to close the position before expiration. Generally, the more time you have on
an Option, the more expensive it will be.
9. Strike Price – This is the price at which you could buy or sell the underlying
futures contract. For example, a December $3.50 corn call allows you to buy a
December futures contract at $3.50 anytime before the Option expires. Most
traders do not convert Option; they just close the Option position and take the
profits
Example of Buying an Option:
Let’s say you expect the price of gold futures to move higher over the next 3-6
months. It is currently January, so you would probably buy an August gold call to
give yourself enough time. Gold is currently trading at $590 per ounce. You expect
the price to climb to $640 within 6 months.
You purchase: 1 August $600 gold call at $15
1 = number of Option you are buying
August = Month of Option contract
$600 = strike price
Gold = underlying futures contract
Call = type of Option (bet on price moving higher)
$15 = premium ($1,500 is the price to buy - 100 ounces of gold x $15 = $1,500)
Call Option Example
10. Suppose the market price of equity share of reliance on the expiration date is
Rs 140 and the exercise price is Rs 125 .The value of call option is Rs 15 [Rs 140 –
Rs 125] In case the value of share on expiration date turn out to be Rs 120 the
value of c would not be negative Rs 5 [Rs 120 –rs125 ], it would be zero as the
investor would not purchase share Rs 125 which is available in the market and
thereby incur a loss Rs 5per share.
Put Option Example
Consider an investor who wants the right to sell reliance equity shares at Rs
135 after 2 months. He is to buy a 2 month put option with a Rs 135 exercise
price. In case the market price of the reliance share increases to Rs 150 (S1< E) the
put option will expire worthless as it will be more profitable for an investor to sell
in the open market at Rs 150 than to the put option writer at Rs 135.
If the market price falls below the sp say to Rs 125 it will be profitable for
the put option holder to excise his put option right as he get Rs 135 compared to Rs
125.
An important difference between futures and options is that trading in futures
contracts is based on prices, while trading in options is based on premiums. The
11. premium depends on market conditions such as volatility, time until expiration, and
other economic variables affecting the value of the underlying futures contract.
The buyers and sellers of futures can be classified as hedgers or speculators.
Hedgers use futures to minimize risk, like the farmers who use futures to
guarantee a price for their product, or a miller who wants a set price for grain when
it is harvested. Futures can also be used to hedge investment portfolios. Thus,
futures is a significant means of price risk transfer—transferring price risk to
someone with an opposite risk, or to a speculator who is willing to accept risk to
make a profit.
Speculators use futures to make a profit, by buying low and selling high (not
necessarily in that order). The speculator has no intention of making or taking
delivery. A speculator is making a bet on the future price of a commodity. If he
thinks the price of the commodity will drop, he takes a short position by selling a
futures contract. If he thinks that the price of the commodity will increase, then he
takes a long position by buying a futures contract. Later, he will close out his
position by offsetting the contract. If he sold short, he will buy back the contract,
and if he bought long, then he will sell the contract.
The buying and selling of futures contracts is a zero sum gain, because it is
basically a contract between 2 traders. It is not an investment in a company that
creates wealth, where every shareholder can win—or lose. If the short side profits,
the long side loses an equal amount, and vice versa.
SWAPS
12. A swap is an agreement between two parties to exchange the cash flows in
the future. The agreement defines the dates when the cash flow are to be paid and
the way it has to be calculated.
There are two basic types of swaps : (1) Interest Rate Swap
(2) Currency Swap
A currency swap is an agreement between two parties to exchange the
principal loan amount and interest applicable on it in one currency with the
principal and interest payments on an equal loan in another currency. These
contracts are valid for a specific period, which could range up to ten years, and are
typically used to exchange fixed-rate interest payments for floating-rate payments
on dates specified by the two parties. Since the exchange of payment takes place in
two different currencies, the prevailing spot rate is used to calculate the payment
amount. This financial instrument is used to hedge interest rate risks
A currency swap agreement specifies the principal amount to be swapped, a
common maturity period and the interest and exchange rates determined at the
commencement of the contract. The two parties would continue to exchange the
interest payment at the predetermined rate until the maturity period is reached. On
the date of maturity, the two parties swap the principal amount specified in the
contract. The equivalent amount of the loan value in another currency is calculated
by using the net present value (NPV). This implies that the exchange of the
principal amount is carried out at market rates during the inception and maturity
periods of the agreement.
Benefits of Currency Swaps
13. • Help portfolio managers regulate their exposure to interest rates.
• Speculators can benefit from a favorable change in interest rates.
• Reduce uncertainty associated with future cash flows as it enables companies to
modify their debt conditions.
• Reduce costs and risks associated with currency exchange.
• Companies having fixed rate liabilities can capitalize on floating-rate swaps and
vice versa, based on the prevailing economic scenario
Limitations of Currency Swaps
• Exposed to credit risk as either one or both the parties could default on interest
and principal payments.
• Vulnerable to the central government’s intervention in the exchange markets.
This happens when the government of a country acquires huge foreign debts to
temporarily support a declining currency. This leads to a huge downturn in the
value of the domestic currency.
COMPANIES BENEFIT FROM INTEREST RATE AND CURRENCY SWAPS
An interest rate swap involves the exchange of cash flows between two
parties based on interest payments for a particular principal amount. However, in
an interest rate swap, the principal amount is not actually exchanged. In an interest
rate swap, the principal amount is the same for both sides of the currency and a
fixed payment is frequently exchanged for a floating payment that is linked to an
interest rate, which is usually LIBOR.A currency swap involves the exchange of
14. both the principal and the interest rate in one currency for the same in another
currency. The exchange of principal is done at market rates and is usually the same
for both the inception and maturity of the contract, generally, both interest rate and
currency swaps have the same benefits for a company. Essentially,
these derivatives help to limit or manage exposure to fluctuations in interest rates
or to acquire a lower interest rate than a company would otherwise be able to
obtain. Swaps are often used because a domestic firm can usually receive better
rates than a foreign firm.
For example, suppose company A is located in the U.S. and company B is
located in England. Company A needs to take out a loan denominated in
British pounds and company B needs to take out a loan denominated in U.S.
dollars. These two companies can engage in a swap in order to take advantage of
the fact that each company has better rates in its respective country. These two
companies could receive interest rate savings by combining the privileged access
they have in their own markets. Swaps also help companies hedge against interest
rate exposure by reducing the uncertainty of future cash flows. Swapping allows
companies to revise their debt conditions to take advantage of current or expected
future market conditions. As a result of these advantages, currency and interest rate
swaps are used as financial tools to lower the amount needed to service a debt.
Currency and interest rate swaps allow companies to take advantage of the
global markets more efficiently by bringing together two parties that have an
advantage in different markets. Although there is some risk associated with the
possibility that the other party will fail to meet its obligations, the benefits that a
company receives from participating in a swap far outweigh the costs.
Examples of Interest rate swaps and Currency swaps
15. Interest rate swaps Example
It can be used to overcome the asset-liability mismatch, with the help of the
following example. Bank A has floating rate assets earning (MIBOR+3%)
(Mumbai Inter Bank Offer Rate) funded with fixed rate liability of 12%. Bank B
has fixed rate assets earning 17%, funded with floating rate liability (MIBOR+1%).
Now, if the interest rate falls, Bank A will suffer as it will receive less on its assets
whereas it will have to pay fixed interest. And if the interest rate rises, Bank B will
suffer as it will have to pay more, liabilities being floating in nature. Hence both
the banks suffer from asset-liability mismatch.
To overcome this, they may enter into a swap transaction wherein:
Bank A will pay Bank B, floating rate of interest, say MIBOR annually, on
the notional principal.
Bank B will pay Bank A, a fixed rate of interest, say 14% annually, on the
same notional principal.
This would ensure that both the banks will stand to gain a definite spread
irrespective of the level of MIBOR.
Currency Swaps Example
16. Suppose company C wants to borrow US$ funds and the Company D wants
to borrow £ funds. Their financing details are given in the following example:
Company $ Borrowing £ Borrowing Preference
C 10% 7% $ Loan
D 11% 11% £ Loan
Spread 1% 4%
From the given information, C enjoys absolute advantage over D in both the
$ and £ loan market. But the comparative advantage for C exists in the £ loan
market. So it is advisable for C to borrow £ funds and for D to borrow $ funds from
the market and then enter into a foreign currency swap deal to achieve their
preferred form of funding with a lower cost. Let us check how to construct a deal
between them. It is assumed that C needs $100 crores. The current spot $/£ rate at
the time of entering into the swap is 1.80 $/£.
The calculation of the benefit earned from the swap is :
Total cost of borrowing without the swap = 10 + 11 = 21%
Total cost of borrowing with the swap = 7+11 = 18%
Therefore, net savings = 3%
This savings may be shared between C and D in a mutually agreed upon
ratio. In our discussion, we assume it to be shared equally for easy calculation.
Hence, the net cost of borrowing for both the parties will be:
C = 10-1.50 = 8.50%
D = 11-1.50 = 9.50%
Their swap structure is :
17. Therefore, to enter into the swap deal the following transactions are
required:
Exchange of Principal: C will borrow £55.55 (100/1.80) crore and
give it to D and D will borrow $100 crore and give it to C.
Interest Payments: C will pay 11% to D on the $100 crore borrowed
by D and D will pay 9.5% to C on the £55.55 crore borrowed by C.
Re-exchange of Principal: After the swap matures, the principal
amount exchanged between C and D will be re-exchanged between
them. That is, C will return $100 crore to D and D will return £55.55
crore to C.