Introduction
1. Monetary market
2. Debt market
3. Equity market
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4. Currency market
5. Derivatives
DERIVATIVES
-Forwards
-Futures
-Options
Futures
sXIX
John produces corn.. Large production
Ruth purchases corn in Chicago large quantities..
They do not know each other
But they share on thing they dont sleep much
Reason:
Do not forget:
Every market is a limited corporation, owned by somebody,
and it is also listed in stock markets as any other corporation that
is concerned with profits, reputation, growth.
She calls her broker and orders him to buy 10 corn futures
settlement date on June 1.10$
Arbitrage:
Arbitrage is the simultaneous purchase and sale of an asset to
profit from a difference in the price. It is a trade that profits by
exploiting the price differences of identical or similar financial
instruments on different markets or in different forms. Arbitrage
exists as a result of market inefficiencies.
Example
Telefonica stock price is in Madrid 20 and in London 25
Then you could buy here and sell there that is arbitrage.
If you buy and sell large amounts a small difference is very
profitable
Futures
Could it be possible to be at 1.30$ in futures market and 1.25$ in
spot. Depend of cost of carry if lower than 0.05$
Pf = Ps + Cc
Buy/sell futures does not mean that you buy or sell any good,
means that you have a compromise to buy/sell something at
a settlement date.
Ana compromised to buy on the 15th June corn from the CH
Then she compromised (before settlement date) to sell corn on
the 15th to the CH
Futures
Ana compromised to buy on the 15th June corn from the CH
Then she compromised (before settlement date) to sell corn on
the 15th to the CH
3.We used an example of first buying futures, but you can also
start in a selling position
Eliminate 3rd trick
Open a Long position = Buy
Open a Short position = Sell
Ana now observes that the price of the corn has broken an
relevant support and she thinks it might go down.. Downward
trend
Then what does she do with corn futures?
Hedger profile
Rex is a ranger in Texas, sells cattle
Risk of Rex = price of cattle might go down 0.96$
What can he do?
1.Do nothing (the most common alternative taken worldwide)
2.To hedge the risk
Hedging two steps
Identify risk risk of Price cattle fall from 0.96
Decide what to do to compensate (offset) possible losses
Example
Repsols CFO and price of oil --- Risk?
Price can go down..
Expected production of oil 2,000mill barrels
Options:
1 Do nothing
2 Hedge the possible downward trend (standard size of contract = 1000
barrels)
Gain= (150-140)*2000*1000=20,000,000