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What is a 'Derivative'
A derivative is a security with a price that is dependent upon or derived from one or more
underlying assets. The derivative itself is a contract between two or more parties based upon the asset or
assets. Its value is determined by fluctuations in the underlying asset. The most common underlying
assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
Derivatives 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.
The value which is derived from the underlying instruments (securities, commodities, fx etc.)
Hedging is a concept which describes the derivative instruments to minimize the risk of Loss.
Listed
OTC
Define condition type
Std. flow type for listed &OTC derivatives = 1500 (purchase), 1510 (Sale)
Derived Flows:
Update types:
New entires.
Usage type for listed derivatives is = Marginal management listed Options and Futures.
OTC Derivatives
When stocks are not listed in resister stock exchanges
Multinational commodities market from Market data management not from Master data.
1. Options
2. Forwards
3. Swaps
Not recommended
OTC int derivatives: all products having interest (bond, FD) not applicable to commodities/FX/Stocks.
Need to maintain for all above product category for each OTC derivatives.
OTC Options:
(Exercise means to put into effect the right specified in a contract. In options trading, the option
holder has the right, but not the obligation, to buy or sell the underlying instrument at a specified
price on or before a specified date in the future. If the holder decides to buy or sell the underlying
instrument (rather than allowing the contract to expire worthless or closing out the position), he or
she will exercise the option, and make use of the right available in the contract).
OTC Forwards.
()
Commodity Forwards:
Security Forwards:
OTC SWAPS:
Transaction management
CAP/FLOOR
SWAPS
FRA
For all the above production we need to maintain both purchase and sale.
In addition - Generate initial margin flow.
OTC interest rate derivatives: need to maintain both purchase and sale for all 3 products.
1. For OTC products (two products OTC purchase and OTC sales)maintain both purchase and Sale.
Flow type :
General Setting
Define Calculation indicator:
Define Portfolio:
Define Traders: Biz takes place between counterparty and Issuer. Normally Demant account created
by Traders.
Transaction management
General valuation class