You learned the word "tree" when you were very young, and someone will definitely point to the tree and say "tree!" They won't say "Norwegian maple" and certainly won't say "Norwegian maple!" then

All you know is that there are many kinds of trees. They are similar in some places and different in some places. This learning method uses abstract concepts, and our brains enjoy it. We can use the same method when studying derivatives.

So what are abstract derivatives? Derivatives are a kind of price guarantee.

Almost all derivatives are agreements between future buyers and sellers. Each derivative specifies that it can

In order to buy and sell the price of a specific commodity at some future time. This specific commodity, also known as "basic assets", can be tangible goods, such as corn and natural gas, or financial assets, such as stocks.

Government bonds or a more abstract price index (explained later). Each derivative also specifies a delivery date, and the contract must be traded on or before that date. This is the common element of all derivatives:

Buyer, seller, underlying assets, future price and delivery date.

Just like a bush, although it looks like a tree, it is not exactly the same as a tree. Some derivatives can also provide protection for things other than price.

Certificate. Among these derivatives, the first one is credit derivatives. These are performance guarantees, not price guarantees, and will be introduced in detail in a separate chapter. There are also some weather derivatives, which are qi.

Such as temperature and rainfall. Nevertheless, most derivatives are still price guarantees, so now we can assume that derivatives are price guarantees.

Just like the trees we see,

Derivatives are also different in form and scale. Some derivatives are very simple, and now they are widely used, just like wrenches used by plumbers. Other derivatives are famous for their singularity. it

They are so complicated that both buyers and sellers may not really understand them (which may lead to many problems). But all derivatives, no matter how strange, are changes to the following four basic derivatives.

Different, or a combination of them. A forward contract is a contract in which the buyer and the seller agree to buy and sell a certain number of underlying commodities at a certain price at a certain time in the future.

Futures contracts are standardized forward contracts, and buyers and sellers need to execute the contracts on the exchange.

A swap contract refers to an agreement that both parties agree to exchange cash flows at some time in the future. Usually, one party's cash flow is based on changing or floating prices, while the other party's cash flow is based on fixed prices. Option contracts give option holders the right (but not the obligation) to buy and sell a certain number of underlying assets at a certain price within a specified period of time, and options are mostly executed on exchanges.

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The following chapters will study the basic characteristics of these four derivatives and the differences between these four interrelated contracts. For example, through analysis, we will find that the forward contract is actually a highly user-oriented contract.

Futures contracts. Swap contracts are essentially a series of interrelated forward contracts. Buyers and sellers of forward, futures and swap contracts have the obligation to trade in a certain period of time in the future, while buyers of options have no such obligation.

Option is also the only one of these four derivatives with intrinsic value. Because futures and options are traded on exchanges, they are more liquid than forward and swap contracts (the trading volume on a specific date is larger)

Large), more replaceable (one commodity is as good as other commodities).

Despite these differences, forwards, futures, swaps and options are all forms of price guarantee. All kinds of complex derivative contracts are based on these four basic contracts. Why are they called derivatives?

We usually define derivatives as "financial instruments whose value comes from other commodities". This definition is clear, but not detailed enough. Now, let's analyze this definition and expand it slightly to see what "derivative" is. By the way, if you have studied calculus, do you remember derivatives? It is the same word as derivative, but they are different things.

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Financial instrument is a standardized agreement or contract, which stipulates the rights and obligations of both parties. Mortgage is a financial tool, and you can own a house (yours) by monthly installment (your obligation).

Rights). Stock is a very common financial instrument, which gives shareholders the right to enjoy part of the company's rights and interests. Paper money is also a financial instrument (including yen, dollar, etc.). ), which gives the holder the right to buy. undoubted

Term life insurance is another common financial tool. If the insured dies before the insurance expires, he will get compensation from the insurance company. These are all financial instruments.

Financial instruments are very valuable,

This is very important. In new york Stock Exchange, Microsoft shares can be sold for $24.98 per share, while IBM shares may reach $ 74.38+0 per share. This is their values, or a little looser.

Say, this is their price. 1 dollar can buy 0.65 pounds, and 10-year government bonds may sell for 95 dollars. But these financial instruments are not derivative financial instruments, because their value does not depend on.

Another financial instrument or commodity. The stock price is determined by the expected return and the relationship between supply and demand. The price of money is determined by factors such as interest rate and trust in the issuer's economic situation.

Derivative finance

Tools are also valuable. Unlike non-derivative financial instruments, their prices are closely related to the current market prices of their underlying assets. For example, a factory specializing in producing tortillas signed a contract with a farmer six months ago.

An agreement to buy 1000 bushels of corn at $25 per bushel today (this is an example of a forward contract). Suppose the market price of corn, that is, the spot price (the spot price is what you can stand now.

That is, the price of buying and delivering) is $28 per bushel. So what is the present value of the forward agreement signed by the tortilla manufacturer? Their price per bushel of corn will be 3 dollars lower than the spot market.

So the value of this forward contract is 1000 bushels times 3 dollars, which is 3,000 dollars. If the spot price is not $28, but $30 per bushel, then the forward price can be obtained in the same way.

The value of this contract is 5000 dollars. It can be seen that the value of this forward contract depends largely on the spot price of corn. Although there are other factors that affect the value of forward contracts, forward contracts and any kind of

The value of derivatives depends largely on the spot price of the underlying assets (hence the name derivatives).

We intuitively think that "value" represents something positive, but for derivatives,

In other words (as do many non-derivative instruments), the value can also be negative, which depends entirely on the individual's perspective. In the above example, we analyzed the forward contract value relative to the tortilla manufacturer. Similarly,

What is the value of our contract to farmers? When the spot price is $28 per bushel and the contract price is $25 per bushel, farmers must sell corn at less than $3 per bushel.

To make tortillas. For the farmer, his contract value is 1000 bushels times -3 dollars, and the total value is-3,000 dollars. Whether the value of a derivative contract is positive or negative depends on what you have in the contract.

The location of. In this sense, many types of derivatives are a "zero-sum game", because for every winner who gains positive profits, there is always a loser who suffers losses.

How to use derivatives

Readers may think that there are countless reasons for using derivatives, but in fact, the application of derivatives is usually based on the following two basic functions: hedging and speculation. Hedgers manage risks through derivatives, and speculators use derivatives to make bets.

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Hedgers use derivatives to reduce financial risks or prevent price trends from going against their expectations. Let's look at the tortilla manufacturer again. Half a year ago, he knew that he needed to buy jade six months later.

rice. At the same time, they are faced with the possibility of a sharp rise in corn prices, so they use forward contracts to avoid the risk of price increases. In order to achieve the same goal, futures contracts or option contracts can also be used. Zuiguan

The key point, which is also very surprising to us, is that financial risks exist objectively, but by using derivative financial instruments, this risk can be reduced or hedged. The seventh chapter is about "using derivative financial instruments"

With the management of risk, it is to hedge the risk through hedging.

Speculators do not use derivatives to reduce financial risks, but profit from them. People usually euphemistically refer to speculation as long-term speculation.

The price "holds a certain opinion" because "holds a certain opinion" sounds better than "gambling". But relative to uncertain future returns, speculation is almost equivalent to gambling. If someone thinks that IBM's stock

The price will be higher after six months, so this person can buy IBM shares at the current price after six months by buying IBM stock options. If the prediction is accurate, then he can get

Huge profits. But if he makes a mistake, he will lose the option fee he paid, or invest all of it. This is speculation.

Many hedging and speculation can be realized by trading the underlying securities.

To achieve the goal, hedging and arbitrage can be carried out without derivatives, so derivatives are worthless. Then why use derivatives? This is because derivatives use leverage when trading.

Weapons. Technically, leverage here refers to the use of borrowed funds. Just like the nutcracker we use in real life, we use the lever principle to gather strength through pliers, even if it is a child.

You can also crush nuts. Derivative financial instruments accumulate financial power In this way, hedgers and speculators can accomplish a lot of work with less power. Let's take a look at speculators who speculate on IBM stocks.

People. If they buy some stocks and hold them for six months, they can also sell them at a profit when the stock price really rises in line with the forecast. If you buy options, you can achieve the same effect, but because of the term.

The rights issue is much cheaper than the stock itself, and only a small amount of money needs to be paid in advance. But this kind of lever can't be used at will. For speculators, price is the amplified downside risk. If IBM stock speculators

If they don't use options correctly, they will lose all their investments. If they buy stocks, they will only lose part of their investment. They still hold these stocks, which may appreciate in the future.

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Market makers and arbitrageurs are two other people who use derivatives. Market makers are wholesalers engaged in derivatives trading. They are like fishmongers, buying at a low price, selling at a high price and profiting from the difference. Sometimes they buy it back to eat,

But many times, for those who want to buy, they act as sellers and for those who want to sell, they act as buyers. They will also take as few risks as possible when doing these things (how to avoid risks will come later)

Chapter talks about).

Arbitrators also try to avoid risks. They look for securities with "wrong" or "invalid" prices in the capital market and try to profit from them. If they judge correctly, they will understand.

This is a risk-free profit. For example, an arbitrageur finds that the price of the same option is $5 in one market and $ 5. 1 in another market, so they buy it for $5 and buy it in another market at the same time.

Sell it at a price of $ 5. 1 and earn a risk-free profit. As the market becomes more and more efficient, the space for arbitrage becomes smaller and smaller, but their existence is a powerful driving force for pricing derivatives. These we

This will be seen in later chapters. Others are interested in derivatives-regulators, accountants, system developers and so on, but hedgers, speculators, market makers and arbitrageurs are the main traders of derivatives.

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What is the position of investors in the derivatives world? Most investors, of course, are small-scale investors. They don't trade derivatives, because derivatives may not achieve their investment purposes. some

Investors also use derivatives, but they all exist as hedgers or speculators. In future research, readers will see "protective placement". By hedging stock positions with protective put options, you can

To reduce the risk of market decline. From the above introduction, we can also see that IBM investors use options to speculate on IBM stocks.

Derivatives market

derivant

Where does it appear? They appear in places where derivatives are traded. At present, "derivatives trading" is just that buyers and sellers get together to conclude a contract, and both parties assume obligations for these price guarantees. Every transaction is like this.

One of the processes. The buyer and seller of a transaction are usually called "contract parties". Non-derivative financial instruments such as stocks and mortgages can be traded and derived in specialized markets (such as new york Stock Exchange and banks).

Products also have a special trading market. Like non-derivative financial instruments, there are two main derivatives markets: OTC market and exchange.

The OTC market, that is, the OTC market, is here.

In this market, buyers and sellers directly negotiate transactions, and no one else participates, executes or enforces such derivative transactions. If I exploit oil and you are a refinery, then we may reach a long-term agreement.

About, the contract stipulates that X barrels of crude oil will be bought and sold at the price of $ Y per barrel within two days from today. As long as both parties agree, you can set the values of x, y and z at will, which is completely private. At OTC

The biggest advantage of trading derivatives in the market is that you can tailor the contract for both parties according to their needs. As can be seen from the definition of forward contract, it is an OTC tool, and most swap contracts are also entered in the OTC market.

Used for trading.

In an exchange, potential buyers and sellers can trade here without worrying about finding the other party to the contract. Exchanges provide market makers, and for potential buyers, market makers act as.

As a seller, a market maker acts as a buyer for a potential seller. Because there are strict regulations on derivatives that can be listed and traded, the derivatives traded here have the characteristics of strong liquidity. Although both the buyer and the seller lost.

They have lost the ability to conclude contracts according to their own needs, but in turn, they don't have to worry about finding the other side of the contract. From the definition of futures contracts, we can see that futures are derivatives traded on exchanges, and so are most option contracts.

Trading on the exchange.

Another significant difference between OTC market and exchange is performance guarantee. In over-the-counter market transactions, there is no guarantee that both parties will eventually perform the contract. Because when

When the transaction is executed, the seller may decide not to sell, and the buyer may refuse to buy. Transactions completed at the exchange can ensure that both parties to the contract fulfill their responsibilities (in fact, there is a clearing house in contact with the exchange).

Together). The exchange guarantees the performance of the contract through margin account and daily settlement. We will talk about these two mechanisms in detail in later chapters.

In addition to exchanges and OTC markets, there are others.

Another derivative trading "market", in which "traders" don't even know that they are trading derivatives. Let's consider a typical mortgage contract, which allows the borrower to pay off the loan in advance without taking any responsibility.

How much is the fine? Here, the borrower actually implemented an "embedded option", which gave the borrower the right to terminate the contract in advance, but not the obligation. Another example is "convertible bonds" issued by many companies.

Securities ",which gives holders the right to convert their positions into company shares. When the implied price of these implied options deviates from the actual price, it provides a good opportunity for arbitrageurs. ) In this book, we are not deep.

Some people analyze these "hidden" markets, but one thing is very certain. The basic principles of derivatives in these markets are the same as those of traditional exchanges and counter transactions.