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Derivative Markets - Prof. Dr AP Faure

Year 2013

1. Context1.1. Learning outcomes1.2. Introduction1.3. The financial system in brief1.4. Ultimate lenders and borrowers1.5. Financial intermediaries1.6. Financial instruments1.7. Spot financial markets 1.7.1. Introduction1.7.2. Primary and secondary markets1.7.3. Debt market1.7.4. Share / equity market1.7.5. Foreign exchange market1.8. Interest rates1.9. The derivative markets1.10. Summary1.11. Bibliography2. Derivative markets: forwards2.1. Learning outcomes2.2. Introduction2.3. Spot market: definition2.4. Forward market: definition2.5. An example2.6. Forward markets2.7. Forwards in the debt markets2.7.1. Introduction2.7.2. Forward interest rate contracts Introduction2.7.2.2. Example: OTC market2.7.3. Repurchase agreements Introduction2.7.3.2. Definition2.7.3.3. Terminology2.7.3.4. Example2.7.3.5. Motivation for repos2.7.3.6. Institutions involved in the repo market2.7.3.7. Types of repurchase agreements2.7.3.8. Securities that underlie repos2.7.3.9. Mathematics of the repurchase agreement market2.7.3.10. Repos and the banking sector2.7.3.11. Listed repurchase agreements2.7.4. Forward rate agreements 2.8. Forwards in the share / equity market2.9. Forwards in the foreign exchange market 2.9.1. Introduction2.9.2. Outright forwards Introduction2.9.2.2. Example one2.9.2.3. Example two2.9.3. Foreign exchange swaps2.9.4. Forward-forwards2.9.5. Time options2.9.6. Functions/uses of the forward foreign exchange market2.10. Forwards in the commodities market2.11. Forwards on derivatives2.12. Organisational structure of forward markets2.13. Summary2.14. Bibliography3. Derivative markets: futures3.1. Learning outcomes3.2. Introduction3.3. Futures defined3.3.1. Introduction3.3.2. Standardised contract between two parties3.3.3. Buyer and seller3.3.4. Delivery3.3.5. Standardised quantity3.3.6. Standardised quality3.3.7. Asset3.3.8. Price3.3.9. Expiry date3.3.10. Market price3.4. An example3.5. Futures trading price versus spot price3.6. Types of futures contracts3.7. Organisational structure of futures markets3.8. Clearing house3.9. Margining and marking to market3.10. Open interest3.11. Cash settlement versus physical settlement3.12. Payoff with futures (risk profile)3.13. Pricing of futures (fair value versus trading price)3.14. Fair value pricing of specific futures3.14.1. Introduction3.14.2. Short-term interest rate futures3.14.3. Individual bond futures3.14.4. Equity / share index futures3.14.5. Individual equity / share futures3.14.6. Commodity futures3.14.7. Currency futures3.14.8. Futures on other derivatives3.14.9. Other futures3.15. Basis3.16. Participants in the futures market3.16.1. Introduction3.16.2. Investors3.16.3. Arbitrageurs3.16.4. Hedgers3.16.5. Speculators3.16.6. Closing remarks3.17. Hedging with futures3.17.1. Introduction3.17.2. Hedging basics and jargon3.17.3. Hedging using the 3-month JIBAR future3.17.4. Hedging with share index futures3.17.5. Hedging with currency futures3.18. Basis trading3.19. Spread trading3.20. Futures market contracts3.21. Risk management by a futures exchange3.22. Economic significance of futures markets3.22.1. Introduction3.22.2. Price discovery3.22.3. Market liquidity3.22.4. Market efficiency3.22.5. Allocation of resources3.22.6. Capital formation3.22.7. Output3.22.8. Competition3.22.9. New product development3.22.10. Public welfare3.23. Summary3.24. Bibliography4. Derivative markets: swaps4.1. Learning outcomes4.2. Introduction4.3. Interest rate swaps4.3.1. Introduction4.3.2. Motivation for interest rate swaps4.3.3. Coupon swap: transforming a liability4.3.4. Coupon swap: transforming an asset4.3.5. Coupon swap: comparative advantage4.3.6. Variations on the theme4.4. Currency swaps 4.4.1. Definition4.4.2. Simple currency swap4.4.3. Comparative advantage currency swap4.4.4. Variations on the theme4.5. Equity / share swaps 4.5.1. Introduction4.5.2. Example of equity / share swap4.5.3. Variations on the theme4.6. Commodity swaps4.7. Listed swaps4.8. Organisational structure of swap market4.9. Summary4.10. Bibliography5. Derivative markets: options5.1. Learning outcomes5.2. Introduction5.3. The basics of options 5.3.1. Definitions5.3.2. Payoff profiles Introduction5.3.2.2. Call option: buy (long call) at expiry5.3.2.3. Call option: sell (write) (short call) at expiry5.3.2.4. Put option: buy (long put) at expiry5.3.2.5. Put option: sell (write) (short put) at expiry5.4. Intrinsic value and time value5.4.1. Introduction5.4.2. Intrinsic value5.4.3. Time value5.5. Option valuation/pricing5.5.1. Introduction5.5.2. Black-Scholes model5.5.2.1 Introduction5.5.2.2. Spot (current) price of underlying asset and exercise price5.5.2.3. Time to expiration5.5.2.4. Risk free rate5.5.2.5. Dividends5.5.2.6. Volatility5.5.2.7. The model5.5.3. Example of black-scholes option pricing5.5.4. Binomial model5.5.5. Other models5.5.6. The Greeks5.6. Organisational structure of option markets5.7. Options on derivatives: futures5.7.1. Introduction5.7.2. Example5.7.3. Option specifications5.8. Options on derivatives: swaps5.9. Options on debt market instruments5.9.1. Introduction5.9.2. Options on specific money market instruments5.9.3. Caps and floors Description5.9.3.2. Caps9.3.3. Floors5.9.4. Options on specific bonds5.9.5. Options on bond indices5.9.6. Bond warrants (call options)5.9.7. Bond warrants (retail options)5.9.8. Callable and puttable bonds (bonds with embedded options)5.9.9. Convertible bonds5.10. Options on equity / share market instruments5.10.1. Introduction5.10.2. Options on specific equities5.10.3. Options on equity / share indices5.10.4. Equity / share warrants (call options)5.10.5. Equity / share warrants (retail options)5.10.6. Redeemable preference shares5.11. Options on foreign exchange 5.11.1. Introduction5.11.2. Options on foreign exchange (wholesale)5.11.3. Options on foreign exchange (retail: warrants)5.12. Options on commodities5.13. Option strategies5.13.1. Introduction5.13.2. Straddle5.13.3. Strangle5.13.4. Delta hedging5.14. Exotic options5.15. Summary5.16. Bibliography6. Other derivatives6.1. Learning outcomes6.2. Introduction6.3. Securitisation6.4. Credit derivatives 6.4.1. Introduction6.4.2. Example of credit default swap6.4.3. Pricing6.5. Weather derivatives6.6. Carbon credit derivatives6.7. Freight (or shipping) derivatives6.8. Energy derivatives6.9. Summary6.10. Bibliography
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