This book captures present practice and reflects what the universal investment practitioner needs to identify about derivatives. It does not merely distribute details of a variety of derivatives instruments and positions. However, it gives inspiration for each derivatives location by explaining what the manager wants to get prior to addressing the details of the position.
I have read this book completely-it is really supportive. He is also the writer of the university text An Introduction to Derivatives and Risk Management, 6th edition, Essays in Derivatives , and lots of academic along with practitioner articles. He has wide knowledge as an advisor and a teacher in professional training programs.
You are most welcome in our blogs and feel free to leave your valuable comments on Analysis of Derivatives for the CFA Program. Your email address will not be published. Privacy Policy Terms Of Service. These are designed to shift risk fron one party to another allowing an ever widening array of risks to be traded. Derivatives mainly consist of futures and forwards, Options and Swaps. It is used as a powerful risk management tool for hedging risk in the concerned Vol. Various derivative products derived like bullion, real estate, stocks, and commodities are being traded in different exchanges in the world.
In , the world successful exchange Chicago Mercantile Exchange started trading of currency futures contract, then in Philadelphia Stock Exchange products got popularity and started trading in most of the stock exchanges.
During theses days Orange Country, California, and the Barings Bank experienced bankruptcy due to poor investments in financial derivatives. At that time many policymakers feared more collapsed banks, counties, and countries. Those fears proved unfounded; prudent use, not government regulation, of derivatives headed off further problems.
Now, however, the Financial Accounting Standards Board, the Federal Reserve, and the Securities and Exchange Commission are debating the merits of new rules for derivatives. But before adopting regulations policymakers need to separate myths about those financial instruments from reality.
Future contracts are the organized contracts in terms of quantity , quality , delivery time and place for settlement on any date in future. The contract expires on a pre-specified date which is called the expiry date of the contract. On expiry, futures can be settled by delivery of the underlying asset or cash. The underlying asset could include securities, and index of prices of securities etc.
Index Futures: Futures contract based on an index i. These contracts derive their value from the value of the underlying index. Index Option Contracts are generally European Style options i. An index in turn derives its value from the prices of securities that constitute the index and is created to represent the sentiments of the market as a whole of a particular sector of the economy.
By its very nature ,index cannot be delivered on maturity of the Index futures or Index option contracts. Therefore, these contracts are essentially cash settled on expiry.
Commodity Derivatives: Futures contracts in pepper, turmeric, jaggery, jute fabric, jute sacking, castor seed, potato ,coffee, cotton, and soybean and its derivatives are traded in 18 commodity exchanges located in various parts of the country. Futures trading in other edible oils, oilseeds and oil cakes have been permitted.
Trading in futures in the new commodities especially in edible oils, is expected to commence in the near future. The sugar industry is exploring the merits of trading sugar futures contracts Swaps: Around the first swap contracts were developed.
A swap is another forward- based derivative that obligates two counterparties to exchange a series of cash flows at specified settlement dates in the future. There are two principal types of swaps: interest-rate swaps and currency swaps. Financial derivatives have changed the face of finance by creating new ways to understand measure, and manage financial risk. Ultimately, derivatives offer organizations the opportunity to break financial risks into smaller components and then to buy and sell those components to best meet specific risk management objectives.
Moreover, under a market- oriented philosophy, derivative allow for the free trading of individual risk components, thereby improving market efficiency. Banks and other financial intermediaries responded to the new environment by developing financial risk-management products designed to better control risk. The first one simple foreign exchange forwards that obligated one counterparty to buy, and the other to sell, a Vol. By entering into a foreign exchange forward contract, customers could offset the risk that large movements in foreign exchange rates would destroy the economic viability of their overseas projects.
Thus, derivatives were originally intended to be used to effectively hedge certain risks; and, in fact, that was the key that unlocked their explosive development. Those often-quoted figures are notional amount. For derivatives, notional principal is the amount on which interest and other payments are based. Notional principal typically does not change hands; it is imply a quantity used to calculate payments.
Financial derivatives can be used in two ways ; to hedge against unwanted risks or to speculate by taking a position in anticipation of a market movement. Organizations today can use financial derivatives to actively seek out specific risks and speculate on the direction of interest-rate or exchange-rate movements, or they can use derivatives to hedge against unwanted risks.
Hence, it is not true that only risk-seeking institutions use derivatives. Indeed, organizations, should use derivatives as part of their overall risk-management strategy for keeping those risks that they are comfortable managing and selling those that they do not want to others who are more willing to accept them.
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