Академический Документы
Профессиональный Документы
Культура Документы
Financial
Derivatives
Starting in the 1970s, the world became a
riskier place for financial institutions.
Interest rate volatility increased, as did the
stock and bond markets. Financial
innovation helped with the development of
derivatives. But if improperly used,
derivatives can dramatically increase the
risk institutions face.
25-2
RISK MANAGEMENT PROCESS
25-3
What can companies do to
minimize or reduce risk exposure?
Transfer risk to an insurance company by
paying periodic premiums.
Transfer functions that produce risk to third
parties.
Purchase derivative contracts to reduce input
and financial risks.
Take actions to reduce the probability of
occurrence of adverse events and the
magnitude associated with such adverse
events.
Avoid the activities that give rise to risk.
What is financial risk exposure?
25-7
Stock Index Futures
Options
Interest-Rate Swaps
Credit Derivatives
25-8
Hedging
25-9
Difference between Hedging and
Speculation
25-10
Hedging
25-11
Forward Markets
25-12
Forward Markets
Long Position
Agree to buy securities at future date
Hedges by locking in future interest rate of funds
coming in future, avoiding rate decreases
Short Position
Agree to sell securities at future date
Hedges by reducing price risk from increases in
interest rates if holding bonds
25-14
Forward Markets
Pros
1. Flexible
Cons
1. Lack of liquidity: hard to find a counter-party
and thin or non-existent secondary market
2. Subject to default riskrequires information
to screen good from bad risk
25-15
Financial Futures Markets
25-16
Financial Futures Markets
25-17
Example: Hedging Interest Rate Risk
25-18
Example: Hedging Interest Rate Risk
25-19
Financial Futures Markets
25-20
Financial Futures Markets
25-21
Following the News
25-22
Financial Futures Markets
25-23
Widely Traded Financial
Futures Contracts
Financial Futures Markets
25-25
Hedging FX Risk
25-26
Hedging FX Risk
25-27
Hedging FX Risk
25-28
Hedging FX Risk
25-29
Stock Index Futures
25-30
Stock Index Futures
25-31
Hedging with Stock Index Futures
25-32
Hedging with Stock Index Futures
25-33
Hedging with Stock Index Futures
25-34
Hedging with Stock Index Futures
25-35
Options
25-36
Option terminology
if i falls:
Additional advantage if macro hedge: avoids
accounting problems, no losses on option if i falls
25-43
Options
Factors Affecting Premium
25-45
Hedging with Options
25-46
Hedging with Options
25-47
Hedging with Options
25-48
Hedging with Options
25-49
Hedging with Options
25-50
What are the assumptions of the
Black-Scholes Option Pricing
Model?
ln(P/X) [k RF t]
2
d1
t
d2 d1 - t
V P[N(d1 )] - Xe -k RF t
[N(d2 )]
Use the B-S OPM to find the option value
of a call option with P = $27, X = $25,
kRF = 6%, t = 0.5 years, and 2 = 0.11.
-k RF t
V P[N(d1 )] - Xe [N(d2 )]
-(0.06)(0.5 )
V $27[0.7168] - $25e [0.6327]
V $4.0036
How do the factors of the B-S
OPM affect a call options value?
As the factor increases Option value
Current stock price Increases
Exercise price Decreases
Time to expiration Increases
Risk-free rate Increases
Stock return variance Increases
Interest-Rate Swaps
25-57
Interest-Rate Swap Contract Example
25-59
Hedging with Interest-Rate Swaps
25-60
Hedging with Interest-Rate Swaps
Advantages of swaps
1. Reduce risk, no change in balance-sheet
2. Longer term than futures or options
Disadvantages of swaps
1. Lack of liquidity
2. Subject to default risk
Financial intermediaries help reduce
disadvantages of swaps (but at a cost!)
25-61
Credit Derivatives
25-62
Credit Derivatives
25-63
Credit Derivatives
25-64
Credit Derivatives
25-65
Credit Derivatives
25-66
Credit Derivatives
25-67
Credit Derivatives
25-68
Credit Derivatives
25-69
Credit Derivatives
25-70
Credit Derivatives
25-71
Are derivatives a time bomb?
25-72
Are derivatives a time bomb?
25-73
Are derivatives a time bomb?
25-74
Are derivatives a time bomb?
25-75
Chapter Summary
25-76
Chapter Summary (cont.)
25-77
Chapter Summary (cont.)
25-78
Chapter Summary (cont.)
25-79