FİNANSAL PİYASALAR VE KURUMLAR

Derivative instruments whose performance is determined by underlying assets are generally classified as forward, futures, swap, and option contracts.

The clearinghouse of the exchange provides a guarantee to the winning party that if the counterparty refuses to pay, the clearinghouse will pay instead.

The OTC contracts are customized contracts, and they are less liquid than exchange-traded derivative contracts. They are also relatively less transparent.

Futures contracts are the same as forward contracts except that futures contracts are organized, regulated and managed by an exchange. In other words, futures contracts are standardized.

MMY = BEY*(360/365) 

MMY = (3.8%)*(360/365) = 3.75%

A contingent claim is a derivative that provides a buyer of option the right to buy or sell an underlying asset at a price previously agreed upon on a specified future date. Unlike forward commitment contracts, contingent claims give the holder of the contract the right, not the obligation to buy or sell an underlying asset.

Options can also be divided into two types according to the time when options can be exercised: American options and European options. American options can be exercised any time up to the expiration date, while European options are exercised only on the expiration date.

The OTC contracts are customized contracts, and they are less liquid than exchange-traded derivative contracts.

Payoff to long forward = Spot price at expiration − forward price

Put option contracts grand their buyers the right but not obligation to sell the underlying asset.

Options are contingent claim contracts that provide the right but not the obligation to buy an asset at a specific price at a later date in the future.

A swap contract can be defined as an OTC contract between two parties who agree to exchange cash flows on regular dates, where one party pays a variable payment, and the other party pays either a fixed or variable amount calculated on a different basis.

Futures contracts are the same as forward contracts except that futures contracts are organized, regulated and managed by an exchange.

It is an OTC contract in which a buyer and a seller commits each other to do a transaction on a specific underlying asset at a future date at a previously determined fixed price.

A call option is in the money, if the market price is above the strike price. A call option is out of the money, if the market price is below the strike price. A call or put option is at the money, if the market price is equal to the strike price. A put option is in the money, if the market price is below the strike price. A put option is out of the money, if the market price is above the strike price.

Almost all multinational corporations use options as a tool to manage their exposure to currency risk, and exchange rates are the underlying assets in their case.

A swap contract can be defined as an OTC contract between two parties who agree to exchange cash flows on regular dates, where one party pays a variable payment, and the other party pays either a fixed or variable amount calculated on a different basis. Since swap is an OTC contract, it contains terms and conditions such as the identity of the underlying asset, dates of payments, and the procedure of payment that are agreed upon and written in the contract. In currency swap trades, one party trades swaps currency for a fixed interest rate and where another party trades another currency for a floating interest. Traders usually exchange only the difference in interest payments. In swap trades, the principal traded is called notional.

T = 3/12 = 0.25

F0(T) = S0(1+ r)^T = 120*(1+0.12)^0.25=123.45

American Options can be exercised any time up to the expiration date, while European Options are exercised only on the expiration date.

Similar to futures and forward contracts, swap contracts do not require money exchange at the beginning of the contract, the initial value of a swap contract is zero.

LIBOR stands for London Interbank Offered Rate, which is the floating rate used in swap contracts.

Later in 1981, the first official swap was traded between the World Bank and International Business Machines. Since then, investment banks started providing swap services and the volume and liquidity started to grow and “plain vanilla” swaps were introduced. Plain vanilla swaps are the most famous swap contracts that pursue the conventions of the International Swaps and Derivatives Association Butler. Plain vanilla swap for fixed-for-floating interest rate swap is the most popular type of swap that was introduced to the market in the 1980s.

The payoff for futures contracts is: spot price at expiration - the forward price

V_T= S_T – F₀(T)

V_T= 100 x $4,900 - 100 x $5,300

V_T= -$40,000 

Therefore the payoff for the party with short position is $40,000, since it will be exactly opposite to the payoff to the long position.

The main variables used in the Black-Scholes model include:
• Price of underlying asset, which is a current market price of the asset
• Strike price, which is a price at which an option can be exercised
• Volatility, which is a measure of how much the security prices will move in the subsequent periods. Volatility is the trickiest input in the option-pricing model as the historical volatility is not the most reliable input for this model
• Time until expiration, which is a time between calculation and option’s exercise date
• Interest rate, which is therisk-freeinterest rate.

A swap contract can be defined as an OTC contract between two parties who agree to exchange cash flows on regular dates, where one party pays a variable payment, and the other party pays either a fixed or variable amount calculated on a different basis.