The concept and characteristics of financial derivatives
(1) The concept of financial derivatives
Financial derivatives are based on basic products or basic variables Derivative financial products whose prices are determined by changes in the latter.
(2) Basic characteristics of financial derivatives
1. Intertemporal transactions
2. Leverage Effect
3. Uncertainty and high risk
4. Hedging and speculative arbitrage deposits
2. Classification of financial derivatives< /p>
(1) By type of basic instrument:
1. Equity derivatives
2. Currency derivatives
3. Interest rate derivatives Tools
(2) According to risk-return characteristics:
Symmetric and asymmetric types
(3) According to trading methods and characteristics:
Financial original contracts, financial futures, financial options, financial swaps
The role of financial derivatives in the Asian financial crisis
The inherent vulnerability of the financial system A necessary condition for financial instability, but it often manifests itself only under the influence of external shocks. Financial derivatives continue to innovate and develop, and international hot money and hedge funds are looking for investment and speculation opportunities. The attacks by hedge funds and international hot money are the external causes of the financial crisis.
Starting in 1996, the Thai baht began to falter. Due to excessive speculation in the real estate industry, many financial institutions are in danger of bankruptcy. Thailand's real estate and stock prices have begun to plummet, and the fundamentals of the economy have deteriorated rapidly, increasing market concerns about whether the pegged exchange rate system can be maintained. Thailand has almost no restrictions on the outbound export of its own currency, the baht. The lack of international banking facilities in Bangkok also provides convenience to speculators, and the baht accounts opened by non-residents in Thailand are basically laissez-faire. In late January and early February 1997, the Thai baht was again affected. On March 4, 1997, the Central Bank of Thailand announced that nine domestic finance companies and one housing loan company had asset quality problems and insufficient capital, requiring an increase in capital and an increase in the bad debt provision ratio from 100% to 115%. -l20% and ordered the financial system to increase reserves to 50 billion baht over the next two years. Although the original intention of the Central Bank of Thailand is to stabilize financial markets and enhance people's confidence. However, the results have had a negative effect. People are worried that the central bank's measures will make it more difficult for financial companies and financial institutions to circulate funds. Investors speculate that Thailand's financial system may be a sign of deeper problems, triggering a wave of runs and Prices in securities markets fluctuate wildly.
To launch a sniper war against the Thai baht, hedge funds must first hoard a large amount of Thai baht for sale. Therefore, hedge fund managers must secretly purchase and hoard large amounts of Thai baht. The main sources of Thai baht hoarding are: loans from local banks; financing from offshore financial markets; selling local assets; borrowing stocks from local stock custodians and selling them short in exchange for Thai baht. Due to the backwardness of the currency monitoring system of the Central Bank of Thailand, the Thai government is unable to understand anomalies in Thai baht transactions in a timely manner. In addition to buying Thai baht, during the sniping process, hedge funds also borrowed large amounts of Thai baht through branches of the Bank of Thailand in overseas financial markets and Bangkok International Bank, as well as non-resident accounts in Thailand, including some with very low leverage ratios. Forward contracts, the Thai baht from the above aspects constitute a weapon for hedge funds to launch a sniper attack. After accumulating a large amount of Thai baht, they quickly sold a large amount of Thai baht at a high price in the foreign exchange spot market and exchanged it for US dollars. Due to insufficient information and lack of understanding, it is difficult for investors to make reasonable expectations about the future uncertainty of the market. They often extract information by observing the behavior of the people around them. In the continuous transmission of this information, Many people's information will be roughly the same and reinforce each other, resulting in herd behavior, the so-called "herd effect". "Herding effect" is a non-linear mechanism of collective irrational behavior caused by individual rational behavior. Due to the "herding effect", Thai companies, foreign institutions and small and medium-sized investors will follow suit. In addition, hedge funds will use spot transactions and forward transactions to sell Thai baht in Thailand's domestic market and offshore market. The Thai baht is bound to depreciate significantly. After the sniper took effect and the market exchange rate of the Thai baht dropped sharply, the hedge funds then used US dollars and other foreign currencies to buy Thai baht at low prices to repay the loans, and bought the stocks to return to the stock custodian. In the context of a poor economy, this overwhelming selling caused panic in the market, driving many small and medium-sized retail investors to join the selling ranks, exacerbating the violent downward fluctuations in the Thai baht exchange rate.
At the end of 1993, the daily trading volume of options and futures in Thailand’s financial market reached US$600 million. With the development of communications and information technology, Thailand’s financial derivatives developed rapidly. By the end of 1996, Thailand The financial market has traded a variety of financial derivatives including currency options, currency futures, Treasury bond options, Treasury bond futures, interest rate options, etc., with a daily trading volume of up to US$2 billion. To a certain extent, it provides market conditions for hedge funds to use financial derivatives transactions to carry out sniper warfare in Thailand.
Another strategy used by hedge funds to launch a sniper war against the Thai baht is to use forward contracts in the forward foreign exchange market to create pressure for the Thai baht to depreciate with the help of banks. Hedge funds entered into large forward contracts with banks to sell the baht. When a bank receives a Thai baht forward contract, in order to avoid exchange rate risks, the bank usually takes hedging measures and immediately sells the Thai baht spot to exchange for U.S. dollars. Changes in the supply and demand relationship in the currency market cause depreciation pressure on the Thai baht. After the Thai baht depreciates, hedge fund managers can sign a long forward contract with the same maturity date, the same amount, and the opposite direction before the short forward contract expires for hedging. Or they can be delivered according to the short forward contract, and the hedge funds use financial derivatives such as short Thai baht forward contracts and put options to obtain the intermediate exchange rate difference.
In May 1997, hedge funds and other international hot money used a large amount of short-term monetary capital to conduct arbitrage in Thailand. The Thai baht was short-sold in large quantities, and the baht came under strong depreciation pressure. In order to control capital panic, the Central Bank of Thailand To restore balance to the financial market, a number of defensive measures were taken: First, capital and exchange controls were implemented. The Central Bank of Thailand sold U.S. dollars in foreign exchange reserves in the foreign exchange market and purchased a large amount of Thai baht to keep the baht fixed to the U.S. dollar. exchange rate. Control the provision of credit to foreign speculators (Credit ProVision); second, adopt interest rate defense (Interest Rate Defense), significantly raising the overnight lending rate (0ver Night Rate), and combating the losses of hedge funds and other speculators by increasing transaction costs. Financing costs and transaction costs will curb speculator attacks, thereby curbing panic selling of domestic assets and short positions of speculators. Third, massive intervention in the spot and forward markets will be carried out to ease the depreciation pressure on the Thai baht. However, these emergency measures have had little effect.
The Central Bank of Thailand used foreign exchange reserves to intervene in the market. The intervention in the market reduced Thailand's foreign exchange reserves from US$37.7 billion at the end of 1996 to US$33.3 billion in May 1997. Of the US$33.3 billion, 23.4 billion The U.S. dollar is a forward contract that the Bank of Thailand buys to be paid in the next 12 months in order to defend the baht. In fact, Thailand’s foreign exchange reserves are less than US$10 billion, and hedge funds and international hot money have taken advantage of the leverage effect and delayed delivery characteristics of the foreign exchange forward market, forcing the Central Bank of Thailand to be unable to implement market intervention.
It is estimated that speculators invested at least 170 billion baht in the May 1997 attack, creating huge selling pressure. Limited by the Bank of Thailand’s foreign exchange reserves, the scale of the Bank’s foreign exchange reserves is a drop in the bucket compared to the scale of hedge funds and other hot funds. The intervention caused a large loss of Thailand's foreign exchange reserves. When the foreign exchange reserves were almost exhausted, the Thai authorities announced on July 2, 1997 that the Thai baht was forced to abandon the 14-year-old fixation of the baht with the U.S. dollar since 1984. Exchange rate system, a floating exchange rate system was implemented. On January 12, 1998, the Thai baht depreciated against the US dollar to 56.5 baht per US dollar, with a depreciation rate of about 55%.
Measures of raising short-term interest rates and tightening monetary policy have not been effective. The interest rate defense will also overwhelm the already fragile Thai domestic economy, causing huge negative effects. Due to the role of interest rate expectations, rational investors often believe that excessively high interest rate levels may be a temporary measure and cannot be maintained for too long, which reduces the credibility of the central bank's policy intervention and induces speculation in the stock market and stock index futures. Sexual shock The Thai authorities tried to create a "TWO-tier System" by "Split" the domestic money market to protect non-speculative credit needs, which caused offshore market interest rates to skyrocket. , rising to a maximum of 1,300% (1MF, 1998). However, the huge difference between onshore interest rates (0n-shore rate) and offshore interest rates (Off-shore rate) has led to a steady stream of arbitrage activities. In addition, the rise in interest rates has caused a sharp decline in the stock market, and hedge funds have already shorted stocks. Hedge funds can take advantage of the rise in interest rates to do swap transactions and speculate in the stock market to make profits.
Hedge funds and speculators may convert profits from the stock market and stock index futures into foreign currency, further increasing pressure on the Thai baht to depreciate. At the same time, after the Thai baht depreciates sharply, hedge fund managers can buy back Thai baht in US dollars at low prices to repay Thai baht loans and interest. Morton Miller is particularly opposed to the use of measures to raise short-term interest rates and tighten monetary policy, and believes that this is the Bank of Thailand's first mistake in being unable to defend the baht: "Attempts to combat international speculation by raising interest rates and tightening market liquidity. They take it for granted. This is considered to be the most effective way to attract foreign investment (especially the US dollar) and combat international speculation, because speculators usually borrow local currencies to sell short. If interest rates increase, the costs of those speculators will sometimes double or even increase. 10 times, it seems that their speculation costs are horribly high, but in fact, as long as the currency depreciates slightly, short sellers will make a lot of profits. If the currency depreciates by 50% or even 60%, the profits of short sellers will be even greater. From this point of view, raising interest rates will not only fail to combat speculative forces, but will also make short sellers in the forward currency trading market very profitable.
At the same time, currency depreciation caused by higher interest rates has a greater impact on the country's residents. As the crisis worsened, the Thai government had to seek assistance from the International Monetary Fund. Led by the International Monetary Fund, the World Bank, the Asian Development Bank and seven countries and regions provided an emergency loan of US$17.2 billion, but the condition was that the Thai government must implement a series of economic reform plans.
The main contents of the economic reform plan include: using medium-term assistance loans to enrich foreign exchange reserves; reducing overall economic expenditure (including public and private expenditures) and narrowing the current account deficit; restructuring the financial system and cleaning up problematic loans and private sectors. Part of the huge debt; implement development policies, introduce and use foreign capital to solve financial problems"