Financial derivatives (derivatives) refer to contracts whose value depends on changes in the value of underlying assets (underlyings). Such contracts can be standardized or non-standardized. A standardized contract means that the trading price, trading time, asset characteristics, trading methods, etc. of its subject matter (basic asset) are all standardized in advance. Therefore, most such contracts are listed and traded on exchanges, such as futures. Non-standardized contracts refer to the above items that are agreed upon by both parties to the transaction, so they are highly flexible, such as forward agreements.

Financial derivatives are financial-related derivatives, usually referring to financial instruments derived from original assets (Underlying Assets in English). Its most unique feature is margin trading, that is, as long as a certain proportion of margin is paid, full transactions can be carried out without actual transfer of principal. The settlement of the contract is generally carried out by cash difference settlement, and only on the expiration date. Only contracts that are performed by physical delivery require the buyer to pay a full loan. Therefore, financial derivatives transactions have a leverage effect. The lower the margin, the greater the leverage effect and the greater the risk.

As for the types of financial derivatives, there are many in the world, and due to the continuous introduction of new varieties in financial innovation activities, there are more and more things falling into this category. Judging from the current basic classification, there are mainly three categories:

(1) According to the product form, it can be divided into four categories: forwards, futures, options and swaps.

(2) According to the classification of original assets, namely stocks, interest rates, exchange rates and commodities. If further subdivided, the stock category includes specific stocks (stock futures, stock option contracts) and stock index futures and options contracts formed by stock combinations; the interest rate category can be further divided into short-term deposit interest rates as represented by Short-term interest rates (such as interest rate futures, interest rate forwards, interest rate options, interest rate swap contracts) and long-term interest rates represented by long-term bond interest rates (such as bond futures, bond option contracts); the currency category includes various currencies ratio; the commodity category includes various bulk physical commodities.

(3) According to the trading method, it can be divided into on-site trading and over-the-counter trading. On-exchange trading is usually referred to as exchange trading, which refers to a trading method in which all supply and demand parties are concentrated on the exchange for bidding transactions. OTC trading is over-the-counter trading, which refers to a trading method in which both parties directly become counterparties, and its participants are limited to customers with high creditworthiness.

Edit this section features Financial derivatives have the following characteristics:

1. Zero-sum game means both parties to the contract transaction (in standardized contracts, it is uncertain because they can be traded) Profit and loss are completely negatively related, and the net profit and loss is zero, so it is called "zero sum".

2. Intertemporal financial derivatives are transactions in which both parties predict the trend of changes in interest rates, exchange rates, stock prices and other factors and agree to trade or choose whether to trade under certain conditions at a certain time in the future. contract. No matter what kind of financial derivatives it is, it will affect the trader's cash flow in the future or at a certain time in the future. The characteristics of intertemporal trading are very prominent. This requires both parties to the transaction to make judgments on the future trends of price factors such as interest rates, exchange rates, and stock prices. The accuracy of the judgment directly determines the trader's profit and loss.

Financial derivatives

3. Linkage This refers to the fact that the value of financial derivatives is closely linked to the underlying products or underlying variables, and the rules change. Usually, the payment characteristics associated with financial derivatives and basic variables are stipulated in the derivative contract, and the linkage relationship can be a simple linear relationship, or it can be expressed as a nonlinear function or a piecewise function.

4. Uncertainty or high risk The trading consequences of financial derivatives depend on the accuracy of the trader’s prediction and judgment of the future price of the underlying instrument. The unpredictable price of underlying instruments determines the instability of profits and losses in financial derivatives transactions, which is an important reason for the high risk of financial derivatives.

5. The trading of highly leveraged derivatives adopts a margin system. That is, the minimum funds required for the transaction only need to meet a certain percentage of the value of the underlying assets. The margin can be divided into initial margin (initial margin) ), maintains margin, and adopts a marking to market system when trading on the exchange. If the margin ratio during the transaction is lower than the maintenance margin ratio, you will receive a margin call. If investors do not add margin in time, their positions will be forcibly closed. It can be seen that derivatives trading has the characteristics of high risk and high return.

6. Contractual financial derivatives trading is a change in the underlying instrument at a certain date in the future. The handling of rights and obligations under such conditions is legally understood as a contract, which is an economic contract relationship based on a highly developed social credit basis.

7. The object of the virtual financial derivatives contract transaction is the rights and obligations to dispose of the underlying financial instrument under various conditions in the future, such as the right to buy or sell options, and swaps. Debt exchange obligations, etc., constitute so-called "products" and exhibit a certain degree of virtuality.

8. Multiple trading purposes Financial derivatives transactions usually have four major purposes: hedging, speculation, arbitrage and asset and liability management. The main purpose of its transaction is not to transfer the ownership of the underlying financial product involved, but to transfer the risk of value changes related to the financial product or to obtain economic benefits through venture capital.

In addition, financial derivatives also have the characteristics of futurity, off-balance sheet and projectile properties

Edit this paragraph

Financial derivatives

The functions of financial derivatives include risk aversion and price discovery. They are a good way to hedge asset risks. However, everything has a good side and a bad side. Risk aversion must be borne by someone. The high leverage of derivatives transfers huge risks to those who are willing to bear them. This type of trader is called speculation. The risk-averse party is called a hedger, and the other type of trader is called an arbitrageur. These three types of traders simultaneously maintain the above functions of the financial derivatives market. of play.

Improper trading of financial derivatives will lead to huge risks, some of which are even catastrophic. Foreign ones include the Barings Bank incident, the Procter & Gamble incident, the LTCM incident, Bankers Trust, and the domestic State Reserve Copper incident. , the China National Aviation Oil Incident.

Edit this paragraph Types (1) According to the product form, it can be divided into four categories: forwards, futures, options and swaps.

Forward contracts and futures contracts are forms of transactions in which both parties agree to buy or sell a specific quantity and quality of assets at a specific time in the future at a specific price. A futures contract is a standardized contract formulated by a futures exchange, which stipulates the expiration date of the contract and the type, quantity, and quality of the assets traded. A forward contract is a contract signed by the buyer and seller based on their special needs. Therefore, futures trading is more liquid and forward trading is less liquid.

Financial derivatives

A swap contract is a contract signed by two parties to exchange certain assets with each other in a certain period in the future. To be more precise, he said that a swap contract is a contract signed between parties to exchange cash flow (Cash Flow) that they believe has equal economic value within a certain period in the future. The more common ones are interest rate swap contracts and currency swap contracts. If the exchange currencies specified in the swap contract are the same currency, it is an interest rate swap; if they are different currencies, it is a currency swap.

Options trading is the buying and selling of rights. An options contract stipulates the right to buy or sell a specific type, quantity, and quality of a native asset at a specific price at a specific time. Options contracts include standardized contracts listed on exchanges and non-standardized contracts traded over the counter.

(2) According to the original assets, they can be roughly divided into four categories, namely stocks, interest rates, exchange rates and commodities.

If further subdivided, the stock category includes specific stocks and stock indexes formed by stock combinations; the interest rate category can be further divided into short-term interest rates represented by short-term deposit interest rates and long-term bonds. The interest rate represents the long-term interest rate; the currency category includes the ratios between various currencies; the commodity category includes various bulk physical commodities. For details, see Table 3-1

Table 3-1 Classification of financial derivatives based on primary assets

Objective primary asset financial derivatives

Interest rate short-term deposit interest rate futures, interest rate forwards, interest rate options, interest rate swap contracts, etc.

Long-term bond bond futures, bond option contracts, etc.

Stocks, stocks, stock futures, stocks Option contracts, etc.

Stock index stock index futures, stock index option contracts, etc.

Currency various spot currency forwards, currency futures, currency options, currency swap contracts, etc.

Commodities Various physical commodities, commodity forwards, commodity futures, commodity options, commodity swap contracts, etc.

(3) According to the trading method, it can be divided into on-site trading and over-the-counter trading.

On-exchange trading, also known as exchange trading, refers to a trading method in which all supply and demand parties are concentrated on the exchange for bidding transactions. This trading method has the characteristics that the exchange collects deposits from trading participants and is also responsible for clearing and performance guarantee responsibilities. In addition, since each investor has different needs, the exchange designs standardized financial contracts in advance, and investors choose the contract and quantity closest to their own needs for trading. All traders gather in one place for trading, which increases the density of transactions and generally creates a highly liquid market. Futures trading and some standardized options contract trading belong to this trading method.

Over-the-counter trading, also known as over-the-counter trading, refers to a trading method in which both parties directly become counterparties.

This transaction method has many forms, and products with different contents can be designed according to the different needs of each user. At the same time, in order to meet the specific requirements of customers, financial institutions selling derivatives need to have superb financial technology and risk management capabilities. OTC trading continues to generate financial innovation. However, since the settlement of each transaction is carried out by both parties to the transaction, transaction participants are limited to customers with high creditworthiness. Swaps and forwards are representative over-the-counter derivatives.

According to statistics, among the positions of financial derivatives, classified by transaction form, forward trading has the largest position, accounting for 42% of the overall position, followed by swaps (27%), futures (18%) and options (13%). By transaction object classification, interest rate financial derivatives transactions represented by interest rate swaps, interest rate forward transactions, etc. account for the largest market share, accounting for 62%, followed by currency derivatives (37%) and stock and commodity derivatives. (1%). In the six years from 1989 to 1995, the size of the financial derivatives market expanded 5.7 times. The gap between various transaction forms and various transaction objects is not large, and the overall trend is expanding at a high speed.

So far, there are four popular derivatives in the international financial field: swaps, futures, options and forward interest rate agreements. The main purpose of taking these derivatives is to maintain value or speculate. However, the existence and development of these derivative products have their prerequisites, which is a developed forward market.

Edit this paragraph Risk causes Micro-subject reasons for the risks of financial derivatives Weak internal controls and lack of effective supervision of traders are an important reason for the risks of financial derivatives. For example, the extreme chaos in internal risk management was the main reason for the collapse of Barings Bank. First of all, Bahrain Bank lacks a basic risk prevention mechanism. Leeson holds both clearing and trading responsibilities. There is a lack of checks and balances, and it is easy to cover up risks or losses by rewriting transaction records. At the same time, Bahrain Bank also lacks an independent risk control inspection department to monitor Leeson's actions; secondly, Bahrain Bank's management has lax supervision and weak risk awareness. After the Great Kansai Earthquake in Japan, when Leeson turned to the headquarters for help due to insufficient margin on derivative contracts, the headquarters actually transferred hundreds of millions of dollars to the Singapore branch to provide it with unlimited financial support; furthermore, the leadership of Barings Bank The division and tensions among various internal business links caused many informed managers to ignore repeated warnings from market participants and internal review teams, which ultimately led to the collapse of the entire Bahrain Group.

In addition, excessive incentive mechanisms stimulate traders' risk-taking spirit and increase the risk factor in the transaction process.

Macro causes of risks in financial derivatives

Inadequate financial supervision is also another major cause of risks in financial derivatives. The failure of the financial regulatory authorities in the UK and Singapore to supervise or cooperate in advance was one of the important reasons for the collapse of Barings Bank. The problems that arise for the British regulatory authorities are: first, the department responsible for supervising Bahrain and other investment banks has verbally given relief. Bahrain does not need to ask the Bank of England for instructions when it remits huge sums of money to speculate on the Nikkei Index. Second, the Bank of England allowed banks within the Bahrain Group to provide unlimited financial support to the securities sector. The problems existing with the Singaporean financial regulatory authorities are: First, the Singapore International Financial Exchange faces fierce international competition. In order to promote the development of its business, it is too loose in the control of positions, does not strictly enforce the position limit, and allows large accumulations in a single trading account. The Nikkei futures index and Japanese bond futures positions were not monitored in a timely manner on the number of contracts that member companies could hold and the payment of margins. Secondly, Leeson frequently engaged in reverse trading, and the transaction amount was extremely large, but it did not attract the attention of the exchange. If the Bank of England, Singapore and the Osaka Exchange can strengthen communication and share sufficient information, the huge positions held by Barings Bank on the two exchanges will be discovered in time, and perhaps Barings Bank will not collapse.

U.S. Long-Term Capital Management (LTCM) was once the largest hedge fund in the United States, but it staged the largest financial Waterloo in human history in Russia. The existence of a vacuum in supervision is the institutional reason for its huge losses. Even after LTCM's incident, the U.S. financial management authorities did not know its assets and liabilities. Due to the government's relaxation of supervision on banks and securities institutions, many international commercial banking groups and securities institutions provided them with huge amounts of financing without restrictions. As a result, Swiss Bank (UBS) and the Italian Foreign Exchange Administration (UIC) lost US$710 million and US$250 million respectively. billion dollars.

In addition, the reasons for China's "327 Treasury Bond" futures crisis cannot be ignored, in addition to weak market demand and insufficient conditions for the development of derivatives at the time. Excessive speculation and insufficient regulatory capabilities cannot be ignored.

Risk categories

(1) Market risk (2) Credit risk (3) Liquidity risk

(4) Operational risk (5) Legal risk< /p>

Edit this paragraph Risk management For the supervision of financial derivatives, the international community basically adopts a three-level risk management model of enterprise self-control, industry association and exchange self-discipline, and government department supervision.

Internal self-supervision and management of micro-financial entities

Financial derivatives

First, establish a risk decision-making mechanism and internal supervision system, including limiting the purpose, objects, and Target price, contract type, position quantity, stop loss point, transaction process and distribution of responsibilities among different departments, etc. Secondly, strengthen internal control, strictly control transaction procedures, separate operation rights, settlement rights, and supervision rights, have strict and clear-level business authorization, and increase penalties for ultra-authorized transactions; thirdly, set up a dedicated risk management department to The "Value at Risk Method" (VAR) and the "Stress Test Method" record, confirm, and market value traders' transactions, and evaluate, measure, and prevent credit risks, market risks, and liquidity faced in the process of financial derivatives transactions. risks, settlement risks, operational risks, etc. Internal supervision of the exchange

The exchange is the organizer and market manager of derivatives transactions. It formulates on-site trading rules, supervises the business operations of the market, and ensures that transactions are conducted under open, fair, and competitive conditions. . First, create a complete financial derivatives market system, including: a strict market information disclosure system to enhance transparency; a large-amount reporting system; a complete market access system to investigate and evaluate the market credit status of derivatives market traders, and formulate Capital adequacy requirements; and other on-exchange and over-the-counter market trading rules, etc. Second, establish a guarantee system for the derivatives market, including: reasonably formulating and timely adjusting margin ratios to act as the first line of defense; a position limit system to act as the second line of defense; intraday margin call clauses; and daily mark-to-market The system, or mark to market, strengthens the management of clearing, settlement and payment systems; price limit systems, etc. Third, strengthen financial supervision, reform traditional accounting methods and principles based on the characteristics of derivatives, and formulate unified information disclosure rules and procedures so that management and users can clearly understand risk exposures.

Macro-control and supervision by government departments

First of all, improve legislation, establish special and complete laws on financial derivatives, and formulate unified standards for transaction management; secondly, strengthen the supervision of those engaged in financial Supervision of financial institutions that engage in derivatives transactions, stipulates the minimum capital of financial institutions engaged in transactions, determines risk-taking limits, conducts regular and irregular on-site and off-site inspections of financial institutions, and forms an effective control and restraint mechanism; responsible Examine and approve the establishment of derivatives exchanges and the types of derivatives applied for by the exchanges. Thirdly, strictly distinguish banking business from non-banking business, and control the degree of business overlap of financial institutions. At the same time, when a financial institution is in crisis due to an emergency, the central bank should promptly take corresponding rescue measures, quickly inject funds or conduct temporary intervention to avoid excessive shocks in the financial market.

In addition, financial derivatives transactions are booming across borders and across governments around the world. A single country and region is no longer able to comprehensively control its risks. Therefore, international supervision and management of financial derivatives have been strengthened. International cooperation has become the common sense of the international financial community and financial authorities of various countries. After the Barings Bank incident, the Bank for International Settlements has begun a comprehensive investigation and supervision of derivatives transactions and strengthened supervision of the capital adequacy of banks' off-balance sheet businesses.

Edit this paragraph's regional distribution structure of financial derivatives. The exchange financial derivatives market in developed countries in Europe and the United States has concentrated most of the world's exchange financial derivatives transactions. More than 80% of the world's transactions are distributed in North America and In Europe, this concentration trend has become more obvious in recent years. At the end of 1999, 80.5% of the world's notional value of outstanding financial futures and options contracts belonged to North America and Europe. By the end of June 2002, this proportion had increased to 93.7%, with the contract value in North America accounting for 64.6% of the total value.

The United States is the main market for financial derivatives trading on global exchanges, but its status is tending to decline. The financial derivatives contracts traded on U.S. exchanges accounted for 10% of the total in 1986, 1988, 1990, 1992, and 1994 respectively. 91.4%, 74.7%, 65.1%, 53.5%, 44.7% of the global transaction volume; the growth of the European market was the most significant, with the transaction volume in 1994 being 399% of that in 1986; during which Japan's transaction volume increased approximately 7 times. Judging from transaction volume statistics, until 1986, the United States still accounted for 80% of the exchange market transaction volume and outstanding contract value. After 1990, the market outside the United States became increasingly active, and the transaction growth rate began to exceed that of the United States. By 1995, the transaction volume of the market outside the United States had exceeded that of the United States, while the value of outstanding contracts was slightly lower than that of the United States. Judging from transaction volume statistics, the active trend of derivatives trading in markets outside the United States became more obvious after 1990.

OTC financial derivatives market Similar to the exchange market, the OTC financial derivatives market is also mainly distributed in European and American countries. The UK has always maintained its leading position in the OTC market, and its market share continues to rise. Other OTC transactions are mainly distributed in the United States, Germany, France, Japan and other countries (see Table 6). London is the most important center of the OTC financial derivatives market. In 2001, the average daily trading volume reached US$628 billion, an increase of 6% from 1998.

New York ranks second in average daily trading volume at US$285 billion, down 3% from 1998. Frankfurt ranks third in trading volume, having replaced Tokyo in the OTC market. Frankfurt's rise in status is obviously due to the introduction of the euro. and the establishment of the European Central Bank (ECB).

Edit this paragraph Financial derivatives investor structure Financial institutions are the main participants in the financial derivatives market. Taking the United States as an example, the financial institutions involved in derivatives transactions mainly include commercial banks and non-bank savings and loan institutions. (Thrift) and life insurance companies, among which commercial banks are the earliest and most skilled participants. According to a 1993 report by the Group of Thirty, most of the financial institutions surveyed were involved in financial derivatives transactions. 92% of the institutions had used interest rate swaps, 69% had used forward foreign exchange contracts, 69 % of institutions have used interest rate options, 46% of institutions have used currency swaps, and 23% of institutions have used currency options. BIS statistics show that the transaction volume of financial institutions in the global OTC financial derivatives market has grown steadily, increasing by 60% in 2001 compared with 1995. Transactions mainly occur between financial institutions. The average daily transaction volume increased from US$710 billion in 1995 to US$1.2 trillion in 2001. The market share of transactions between financial institutions increased from 80.7% in 1995 to 86.7% in 2001. .

Banks are undoubtedly the protagonists in the financial derivatives market (especially in the OTC market). Since the late 1970s, banks have become increasingly keen on financial derivatives transactions. For example, the U.S. banking industry has been very active in financial derivatives transactions. Very active, from 1990 to 1995, the derivatives-related assets held by banks increased by about 35%, reaching $3.1 trillion, during which the notional value of derivatives contracts held by banks tripled. Banks are the main participants in the financial swap market. At the end of 1992, the outstanding value of global interest rate swap contracts reached US$6 trillion. The 20 financial institutions with the largest positions accounted for more than two-thirds, of which 18 were banks. .