Capital Markets
Chapter 10- Derivative Securities Markets
LG 10-1. Distinguish between forwards and futures contracts
LG 10-2. Understand how a futures transaction is conducted
LG 10-3. Identify information that can be found in a futures quote
LG 10-4. Recognize what option contracts are.
LG 10-5. Examine information found in an option quote.
LG 10-6. Know the main regulators of futures and option markets
LG 10-7. Describe an interest rate swap
LG 10-8. Understand caps, floors, and collars
LG 10-9. Identify the biggest derivative securities markets globally
Derivative securities: Chapter overview * Derivative security: a financial security whose payoff is linked to another, previously issued security. * Generally involves an agreement between two parties to exchange a standard quantity of an asset of cash flow at a predetermined price and at a specific date in the future. * Value of underlying security changes, value of the derivative changes too. * Derivatives = buying and selling, or transference of risk. * Allows individuals who want to bear risk to take risk and people who want to avoid it to transfer if elsewhere. * Failure of derivatives = failure of Lehman Brothers, Bear Sterns, Merrill Lynch, AIG, Citigroup, Countrywide Financial, and the government Fannie Mae and Freddie Mac. * Losses by the mortgage back securities reached over $1 trillion worldwide through 2009. * Option contracts = derivatives because value depends on some underlying asset * Growth of derivative markets mainly started in 1970s * First Wave = Foreign currency futures (from intro of floating exchange rates) * Second Wave = Interest rate derivative securities (from increased volatility of interest rates in late 1970s. * As Interest Rate volatility increased, sensitivity of net worth increased as well. * Third Wave = Credit Derivatives (credit forwards, credit risk options, and credit swaps) – 1990s * Credit forward: a forward
LG 10-1. Distinguish between forwards and futures contracts
LG 10-2. Understand how a futures transaction is conducted
LG 10-3. Identify information that can be found in a futures quote
LG 10-4. Recognize what option contracts are.
LG 10-5. Examine information found in an option quote.
LG 10-6. Know the main regulators of futures and option markets
LG 10-7. Describe an interest rate swap
LG 10-8. Understand caps, floors, and collars
LG 10-9. Identify the biggest derivative securities markets globally
Derivative securities: Chapter overview * Derivative security: a financial security whose payoff is linked to another, previously issued security. * Generally involves an agreement between two parties to exchange a standard quantity of an asset of cash flow at a predetermined price and at a specific date in the future. * Value of underlying security changes, value of the derivative changes too. * Derivatives = buying and selling, or transference of risk. * Allows individuals who want to bear risk to take risk and people who want to avoid it to transfer if elsewhere. * Failure of derivatives = failure of Lehman Brothers, Bear Sterns, Merrill Lynch, AIG, Citigroup, Countrywide Financial, and the government Fannie Mae and Freddie Mac. * Losses by the mortgage back securities reached over $1 trillion worldwide through 2009. * Option contracts = derivatives because value depends on some underlying asset * Growth of derivative markets mainly started in 1970s * First Wave = Foreign currency futures (from intro of floating exchange rates) * Second Wave = Interest rate derivative securities (from increased volatility of interest rates in late 1970s. * As Interest Rate volatility increased, sensitivity of net worth increased as well. * Third Wave = Credit Derivatives (credit forwards, credit risk options, and credit swaps) – 1990s * Credit forward: a forward