This kind of contract can be standardized or non-standardized.
Standardized contracts mean that the transaction price, transaction time, asset characteristics and transaction methods of the subject matter (basic assets) are standardized in advance, so most molecular contracts are listed and traded on exchanges, such as futures.
Non-standardized contract means that the above matters are agreed by both parties to the transaction, so it has strong flexibility, such as forward agreement.
Financial derivatives have the following characteristics:
1. Zero-sum game. That is, the gains and losses of both parties to a contract transaction (which are uncertain because they can trade in standardized contracts) are completely negatively correlated, and the net gains and losses are zero, so it is called "zero sum".
2. High leverage. Derivatives trading adopts the margin system. That is, the minimum capital required for the transaction only needs to meet a certain proportion of the value of the underlying assets. Margin can be divided into initial margin and maintenance margin, and the mark-to-market system is adopted when trading on the exchange. If the margin ratio during the transaction is lower than the maintenance margin ratio, investors will be notified of additional margin. If investors fail to add margin in time, they will be forced to close their positions. It can be seen that derivatives trading has the characteristics of high risk and high income.
The function of financial derivatives is to avoid risks. Price discovery is a good way to hedge asset risks. However, everything has its good side and bad side. If the risk is avoided, someone must bear it. The high leverage of derivatives is to transfer huge risks to those who are willing to bear them. Such traders are called speculators, while risk-averse traders are called hedgers, and another kind of traders are called hedgers.
Improper trading of financial derivatives will lead to huge risks, some of which are even catastrophic. There are Bahrain Bank incident, Procter & Gamble incident, foreign LTCM incident, trust bank incident, China copper reserve incident and China Aviation Oil incident.
(1) According to the product form. It can be divided into four categories: forward, futures, options and swaps.
Forward contracts and futures contracts are both forms of transactions in which both parties agree to buy and sell a certain amount and quality of assets at a certain price at a certain time in the future. Futures contracts are standardized contracts formulated by futures exchanges, which stipulate the expiration date of contracts and the types, quantity and quality of assets to be bought and sold. Forward contracts are contracts signed by buyers and sellers according to their special needs. Therefore, the liquidity of futures trading is high and the liquidity of forward trading is low.
A swap contract is a contract signed by two parties to an internal transaction to exchange certain assets with each other in a certain period of time in the future. He said, more accurately, the swap contract is a contract signed by both parties to exchange cash flows that they think are of equal economic value in a certain period in the future. Interest rate swap contracts and currency swap contracts are more common. If the swap currency specified in the swap contract is the same currency, it is an interest rate swap; If it is a foreign currency, it is a currency swap.
Option trading is the trading of buying and selling rights. Option contracts stipulate the right to buy and sell a certain kind, quantity and quality of primary assets at a certain time and at a certain price. Option contracts include standardized contracts listed on exchanges and non-standardized contracts traded over the counter.
(2) According to the primary assets, it can be roughly divided into four categories, namely, stocks, interest rates, exchange rates and commodities. If subdivided, the stock category includes the stock index formed by specific stocks and stock combinations; Interest rates can be divided into short-term interest rates represented by short-term deposit rates and long-term interest rates represented by long-term bond rates; Currency category includes the ratio between different currencies: commodity category includes all kinds of physical commodities. See table 3- 1 for details.
Table 3- 1 Classification of Financial Derivatives Based on Original Assets
Object | Main assets | Financial derivatives
Interest rate | short-term deposits | interest rate futures, interest rate forwards, interest rate options, interest rate swap contracts, etc.
| Long-term bonds | bond futures, bond option contracts, etc.
Stock | stock futures, stock option contracts, etc.
| stock index | stock index futures, stock index option contracts, etc.
Currency | all kinds of cash | currency forward, currency period, currency options, currency swap contracts, etc.
Commodities | All kinds of physical commodities | Commodity forward, commodity futures, commodity options, commodity swap contracts, etc.
(3) According to the transaction method, it can be divided into on-site transaction and off-site transaction.
On-site trading, also known as exchange trading, refers to the trading mode in which all supply and demand sides concentrate on the exchange for bidding trading. The characteristic of this trading method is that the exchange collects the deposit from the trading participants, and is also responsible for liquidation and performance guarantee. In addition, due to the different needs of each investor, the exchange designs standardized financial contracts in advance, and investors choose the contracts and quantities closest to their own needs for trading. All traders are concentrated in one place, which increases the density of transactions and generally forms a highly liquid market. Futures trading and some standardized option contract trading all belong to this trading mode.
OTC, also known as OTC, refers to the way in which both parties directly become counterparties. There are many forms of this transaction, 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. Over-the-counter transactions constantly produce financial innovations. However, because the liquidation of each transaction is carried out by both parties, the participants in the transaction are limited to customers with high credit. Swaps and forwards are representative derivatives of OTC transactions.
According to statistics, among the positions of financial derivatives, according to the transaction form, the positions of forward transactions are the largest, accounting for 42% of the total positions, followed by swaps (27%), futures (18%) and options (13%). In terms of trading objects, interest-related financial derivatives represented by interest rate swaps and interest rate forward transactions have the largest market share, accounting for 62%, followed by currency derivatives (37%) and stock and commodity derivatives (1%). During the six years from 1989 to 1995, the scale of financial derivatives increased by 5. There is little gap between various trading forms and various trading objects, and the whole is expanding at a high speed.