“international finance and payments” lecture xii “using of derivatives in international...

“International Finance and Payments”

Lecture XII

“Using of Derivatives in International Financing”

Lect. Cristian PĂUNLect. Cristian PĂUN

Email: Email: cpaun@ase.ro

URL: http://www.finint.ase.roURL: http://www.finint.ase.ro

Academy of Economic Studies

Faculty of International Business and Economics

International Derivatives Market

Interest rate derivatives – International Market

Derivative1999 2000 2001 2002

FRA’s 6,755 6,423 7,737 9,146

Swaps 43,936 48,768 58,897 68,274

Options 9,380 9,476 10,933 12,575

TOTAL 60,091 64,668 77,568 89,995

Currency derivatives – International Market

Derivative 1999 2000 2001 2002

Forward and futures 9,593 10,134 11,176 11,298

Swaps 2,444 3,194 3,102 3,350

Options 2,307 2,338 2,470 3,427

TOTAL 14,344 15,666 16,748 18,075

Equity derivatives

Derivative 1999 2000 2001 2002

Forward and swap 283 335 320 386

Options 1,527 1,555 1,561 1,828

TOTAL 1,809 1,891 1,881 2,214

Real assets (goods) derivatives

Instrument 1999 2000 2001 2002

Gold 243 218 231 279

Others 305 445 337 444

Forward and swap 163 248 328 388

Options 143 196 279 367

TOTAL 548 662 598 777

Forward contract

LongShort

Profit

Loss

Spot

Forward rate

Forward contracts and credit risk management

Position Risk Position

Creditor currency interest

Short on forward contracts

Debtor currency interest

Long on forward contracts

Forward contract characteristics:

• it is not a standardized contract

• forward price is negotiable

• forward contracts are settled only at the maturity

• there is not a secondary market

• you have no possibility to give the contract to another beneficiary.

Futures contracts

Long futuresShort futures

Profit

Loss

Futures at the Settlement date

Initial Futures

Credit Risk Management using Futures Contracts

Position Risk Position

Creditor currency interest

Short on futures contracts

Debtor currency interest

Long on futures contracts

CALL Options

Loss

ProfitProfit

Loss

Long CALL

Short CALL

PE + Premium

Put Options

Loss

ProfitProfit

Loss

Long PUT

Short PUT

PE - Premium

Credit Risk Management using Options Contracts

Position Risk Position

Creditor currency interest

Long PUT on options contracts

Debtor currency interest

Long CALL on options contracts

Note: Short positions are not desirable for a proper credit risk management

Swap Contracts

Bank A

A

Credit

Bank B

B

Credit

Swap Bank

Swap contract

LIBORFixed

interest rate

Interest rate synthetic instruments / cap

a. « cap »:

Bank A

A Bank B

Premium

Cap

LIBORCredit

i1= i1+ premium – dif.i

Synthetic instruments / floor

b. « floor »:

A

Bank A Bank B

Premium

cap

LIBORCredit

i1= i1 - premium + dif.i

Synthetic instruments / collar

c. « collar »:

Bank A

A

Bank B

LIBOR

TBR

Credit

Credit

Bank C

PremiumCollar