清华大学：《期权、期货衍生产品》（英文版） Chapter1 Introduction

Derivative securities Quanwei cao Department of Finance TSinghua University

Charles Cao 1 Derivative Securities Quanwei Cao Department of Finance Tsinghua University

1. Introduction Summary Introduction to derivatives Futures Contracts Underlying Assets Forward contracts Types of Traders Charles cao

Charles Cao 2 1. Introduction ◼ Summary ◼ Introduction to Derivatives ◼ Futures Contracts ◼ Underlying Assets ◼ Forward Contracts ◼ Types of Traders

What is a derivative? Futures options and swaps aa derivative is a financial contract which has a value determined by the price of something else Charles cao

Charles Cao 3 What is a Derivative? ◼ Futures, options and swaps ◼ A derivative is a financial contract which has a value determined by the price of something else

Example Your family grows corn Your friend 's family buys corn to mil into cornmeal a bushel of corn is not a derivative a It is a commodity Charles cao

Charles Cao 4 Example ◼ Your family grows corn ◼ Your friend’s family buys corn to mill into cornmeal ◼ A bushel of corn is not a derivative ◼ It is a commodity

Example You enter into an agreement with your friend that says: If the price of a bushel of corn in one year is greater than $3, you will pay your friend $1 If the price of corn is less than $3, the friend will pay you $1 This is a derivative Charles cao 5

Charles Cao 5 Example ◼ You enter into an agreement with your friend that says: ◼ If the price of a bushel of corn in one year is greater than $3, you will pay your friend $1 ◼ If the price of corn is less than $3, the friend will pay you $1 ◼ This is a derivative

Example Derivatives provide insurance You earn $1 if your family s corn sells for a low price this supplement your Income Your friend earns $1 if the corn his family bought is expensive this offset the high cost of corn Charles cao 6

Charles Cao 6 Example ◼ Derivatives provide insurance ◼ You earn $1 if your family’s corn sells for a low price; this supplement your income ◼ Your friend earns $1 if the corn his family bought is expensive; this offset the high cost of corn

What is a derivative? Derivatives can be thought of as bets But the bet hedges you both against unfavorable outcomes The contracts has reduced risk for both of you Investors can use derivatives to speculate on the price of corn Key point: how it is used Charles cao

Charles Cao 7 What is a Derivative? ◼ Derivatives can be thought of as bets ◼ But the bet hedges you both against unfavorable outcomes ◼ The contracts has reduced risk for both of you ◼ Investors can use derivatives to speculate on the price of corn ◼ Key point: how it is used

Use of derivatives ■ Risk management Derivatives can be used to reduce risks Hedging Insurance(auto insurance) a speculation Derivatives can serve as investment vehicles Making bets highly leveraged Charles cao

Charles Cao 8 Use of Derivatives ◼ Risk management ◼ Derivatives can be used to reduce risks ◼ Hedging ◼ Insurance (auto insurance) ◼ Speculation ◼ Derivatives can serve as investment vehicles ◼ Making bets highly leveraged

Use of derivatives Reduced transaction costs a Low-cost way to effect a transaction Mutual-fund mangers wish to sell stocks and buy bonds Paying fees and trading costs Futures contracts have low costs Charles cao

Charles Cao 9 Use of Derivatives ◼ Reduced transaction costs ◼ Low-cost way to effect a transaction ◼ Mutual-fund mangers wish to sell stocks and buy bonds ◼ Paying fees and trading costs ◼ Futures contracts have low costs

Futures contracts An agreement to buy or sell an asset at a specified price at a certain time in the future a Traded on exchanges e g, the Chicago Board of Trade(cbot the Chicago Mercantile Exchange(CMe) Charles cao

Charles Cao 10 Futures Contracts ◼ An agreement to buy or sell an asset at a specified price at a certain time in the future ◼ Traded on exchanges, e.g., ◼ the Chicago Board of Trade (CBOT) ◼ the Chicago Mercantile Exchange (CME)