Derivatives: Futures Contract and Hedge Fund

3938 Words16 Pages
Plekhanov Russian Academy of Economics
International Economics

DERIVATIVE MARKETS

FUTURES, FORWARDS, OPTIONS,
SWAPS, CAPS AND FLOOR MARKETS

Prepared by: Zagorskaya Ksenia

1. OVERVIEW OF DERIVATIVE MARKET Derivatives are financial instruments whose value is derived from the value of something else. They generally take the form of contracts under which the parties agree to payments between them based upon the value of an underlying asset or other data at a particular point in time. The main types of derivatives are futures, forwards, options and swaps. Derivative instruments are used as financial management tools to enhance investment returns and to manage such risks relative to interest rates, exchange rates, and financial
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In addition to directional plays (i.e. simply betting on the direction of the underlying security), speculators can use derivatives to place bets on the volatility of the underlying security. This technique is commonly used when speculating with traded options. Speculative trading in derivatives gained a great deal of notoriety in 1995 when Nick Leeson, a trader at Barings Bank, made poor and unauthorized investments in index futures. Through a combination of poor judgment on his part, lack of oversight by management, a naive regulatory environment and unfortunate outside events like the Kobe earthquake, Leeson incurred a $1.3 billion loss that bankrupted the centuries-old financial institution.

3. TYPES OF DERIVATIVES

3.1. OTC AND EXCHANGE-TRADED Broadly speaking there are two distinct groups of derivative contracts, which are distinguished by the way they are traded in market:
Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps, forward rate agreements, and exotic options are almost always traded in this way. The OTC derivatives market is huge.

3.2 EXCHANGE-TRADED DERIVATIVES

Exchange-traded derivatives are those derivatives products that are traded via specialized Derivatives exchanges or other exchanges. A derivatives exchange acts as an
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