“international finance and payments” lecture xii “using of derivatives in international...
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“International Finance and Payments”
Lecture XII
“Using of Derivatives in International Financing”
Lect. Cristian PĂUNLect. Cristian PĂUN
Email: Email: [email protected]
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