DERIVATIVES

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DERIVATIVES

• HEDGING AND SPECULATING

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DERIVATIVES

• Any financial instrument whose payoffs depend in
  a direct way on the value of an underlying
  variable (underlying asset) at a time in the
  future.

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COMMODITIES

• a) physical - raw materials (metals gold,
  silver, platinum, copper)
• - farm produce (wheat,
  coffee, soya, potatoes, pork,
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  tea, coffee, cocoa, sugar, orange juice)
• b) financial - currencies
• - securities (shares, bonds)
• - derivatives futures, options and
  swaps

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Why futures markets?

• There are lots of speculators
• There are manufacturers interested in hedging to
  guarantee a future price

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FUTURE CONTRACTS

• contracts to sell / buy at a future
• date with the price fixed at the
• time of the deal

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HEDGINGProtection against price changing

• Guarantee next seasons price
• when commodity prices are expected
• to rise future prices are higher than spot
  prices
• to fall future prices are at a discount on spot
• prices

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SPECULATORSBuying or selling assets, hoping to
make a profit in the future

• How can speculators make money on currency
  futures?

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• If they correctly anticipate
• a) exchange rate appreciations or
  depreciations
• b) interest rate changes
• (the London International Financial Futures
  
• and Options Exchange LIFFE)

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OPTIONS

• derivative instrument based on another price
• companies hedge equity investments (stocks and
  shares)
• right (not the obligation) to buy/sell securities
  at a fixed
• 
  price in the future
• 1. call option - right to buy at a certain
  price during a
• certain period of time
• 2. put option - the right to sell

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SWAPS

• derivative instrument
• currency swaps (with other institutions to
• achieve interest rate
  savings)
• interest rate swaps

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• http//www.youtube.com/watch?vyTxxSTXg404
• 1.What is the underlying?
• __________________________________________________
  ______
• 2. Why do derivatives exist?
• __________________________________________________
  ______
• 3. What are swaps?
• __________________________________________________
  ________
• 4. What are futures?
• __________________________________________________
  ________
• 5. What are options?
• __________________________________________________
  ________

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• MK p.92 Vocabulary Match up the half-sentences
  and
• 
  write them down
• (1f, 2a, 3e, 4d, 5c, 6b, 7h, 8g)