The methods of change are product decomposition and product synthesis. The basic way is to modify the terms of financial assets contracts and gradually derive and produce new products. The basic method is to modify the most basic derivative contracts such as forward, futures, swaps and options to obtain different products. Other product innovation methods include: synthesizing derivative products with basic assets, and synthesizing derivative products with derivative products to produce new products; Decompose products to produce new products; Increase the contract terms of products, etc.
1 product innovation of contract terms conversion
Standard financial products such as forwards, futures, swaps and options all have basic variables. The basic variables of forward and futures are the underlying assets, execution price and delivery date. The basic variables of swap are swap currency, swap principal, payment time, payment currency, payment interest rate, etc. The basic variables of options are the underlying assets, exercise price, exercise date, exercise rights and so on. By changing these basic variables, we can get very rich financial products.
(1) basic assets. The basic assets can be commodities or financial products, such as corporate bonds, government bonds, foreign exchange, interest rates, stocks and stock indexes. The underlying assets can also be derivative securities, such as forwards, futures, swaps and options and any securities.
(2) the execution price. The execution price is the price determined according to the pre-specified formula. It can be a function of the basic asset price at a certain moment, a function of the basic asset price at a specific time, or a reference index.
(3) Implementation date and delivery date. The execution date and delivery date can be fixed or variable.
(4) the right to execute the transaction. Trading right can be the right to buy basic assets or derivative securities, or the right to sell basic assets or derivative securities; Rights can be exercised or not; Rights can be transferred or not, and so on.
(5) payment currency. The currencies paid by both parties to the contract can be the same or different. You can even pay for basic assets instead of money. (6) Pay interest rate. The interest rate paid can be fixed interest rate or floating interest rate. In addition, the reference payment interest rate may be independent of the payment currency. For example, the interest rate is 6 months' interest rate of British pound, but the currency of payment can be RMB, but it is not paid at RMB interest rate. etc
(7) Time of payment. The payment time can be fixed or variable. The payment time of both parties can also be different. For example, a swap contract does not necessarily require both parties to pay each installment, but one party may pay and the other party may not.
In fact, among all the basic variables of the contract, there is no limit to the choice of specific variable values. The only restriction is that both parties sign the contract voluntarily, and both parties consider the contract fair.
Example 1 Innovative products with changed terms of forward and futures contracts
Commodity (gold, soybean, copper and petroleum) futures, treasury bonds futures, foreign exchange futures, interest rate futures, stock index futures, forward exchange rate agreements and forward interest rate agreements.
Example 2 Innovative products with changed terms of swap contracts
Spread lock swap, basis swap, mixed index stock swap, principal amount fluctuation swap, deferred interest bond swap, zero interest swap, forward swap, commodity swap, stock swap, spread swap, upper and lower limit of spread, spread, upper and lower limit of interest rate, coupon and principal are in different currencies.
Example 3 Innovative Products of Bond Contract Terms Conversion
The basic variables of ordinary bonds are principal, interest, interest and date of payment of principal. Different combinations of these variable values produce different bond derivatives. Zero coupon bonds, interest rate increase/decrease coupons and dual currency bonds can be extended, sold back or redeemed in advance.
Example 4 Product Innovation of Option Contract Term Conversion
Compound options, package options, rainbow options, Asian options, barrier options, currency options, interest rate options, futures options, foreign stock options executed in foreign currency, foreign stock options executed in local currency, swap options, etc.
2 product synthesis product innovation
The method of combining two or more financial products into a new financial product is called product comprehensive innovation. Under ideal conditions, financial products with almost any income distribution can be synthesized.
Example 5 Innovative products of product synthesis
ETF is an innovative product of stock synthesis, and put option is an innovative product of call option and basic asset synthesis. Floating interest rate bills with interest rate ceiling are the synthetic products of floating interest rate bills and short-term interest rate ceiling options. Stock option is a synthetic product of dynamic replication of bonds and basic assets.
3 product decomposition product innovation
Decompose the risk-return characteristics of financial products, change the liquidity, profitability and safety of financial products, and produce products with a new combination of liquidity, profitability and safety.
Example 6 Innovative products of product decomposition
Separation of principal and interest bonds (STRIPS), mortgage-backed securities (MBS) and asset-backed securities (ABS).
4 increase the product innovation of contract terms
A wealth management product is also a contract, which stipulates the rights and obligations of both parties. Appropriately increasing rights and obligations can produce new and innovative products. Common clauses include conversion clauses, resale clauses, redemption clauses, adjustment clauses, extension/advance clauses, floating/fixed clauses, trigger/cancellation clauses, swap clauses, ceiling/guarantee clauses and dependency clauses.
(1) conversion clause. A financial product contract gives one party the right to convert one asset into another.
(2) resale terms. The financial product contract gives the securities holder the right to sell the product back to the issuer at a specific price.
(3) redemption terms. The financial product contract gives the issuer the right to redeem all or part of the securities at a specific price before the securities expire.
(4) adjust the terms. A clause in a financial product contract in which variables such as interest rate, exchange rate and dividend yield can be renegotiated under certain conditions.
(5) Extension/prepayment terms. A clause in a financial product contract in which the term of a security can be extended or shortened.
(6) Floating/fixed terms. During the validity period of a financial product contract, certain economic variables change in a certain way.
(7) Trigger/Cancel clause. Some rights agreed in financial product contracts can be triggered (make the rights effective) or revoked (make the rights invalid) under certain conditions.
(8) Interchange terms. The contract of wealth management products stipulates that two different wealth management products can be converted to each other.
(9) Cap/guarantee terms. A clause in a financial product contract that specifies the range of variable changes. For example, the minimum investment rate guarantee clause and the maximum loan rate clause.
(10) dependency clause. Financial product contracts stipulate that the price of one product is a function of the price of another product or other economic variables.
Example 7 Innovative products with contract terms added.
(1) convertible bonds
The holder of convertible bonds can convert bonds into stocks or another form of bonds. Holders of exchangeable bonds can convert bonds into shares of companies different from the issuing companies.
(2) Selling bonds back
The holder of resolable securities has the right to sell the securities back to the securities issuer at the agreed price.
(3) Redemption of bonds
The issuer of callable bonds has the right to redeem bonds from bondholders at a specified price.
(4) Adjust stocks (bonds)
The dividend rate of permanent preferred shares with adjustable dividend rate shall be adjusted quarterly according to the benchmark treasury bill rate.
(5) Innovative products with deferred/advanced clauses.
For example, the China Development Bank 1 1 financial bonds have a term of three years, with the option of extension, and investors have the right to request an extension of the bond term for another two years after the expiration of three years.
(6) Interest payment of floating/bond floating rate bills changes with the change of reference index.
(7) Trigger/cancel bonds
Knock-in option: the option will only take effect when the price of the underlying asset reaches a certain limit. Eliminate options. Options will only disappear when the underlying asset price reaches a certain limit.
(8) Interchange
Interest rate swap and currency swap products are typical innovative products of swap terms.
The upper and lower interest rates of capped/guaranteed interest rate derivatives are typical innovative products with capped/guaranteed clauses.
(9) Dependent options
Indexed currency option notes (1CON), cross index basic notes (CrosslndexBasisNote) and other products.
Article 5 Increase the product innovation portfolio of product portfolio
In the face of different terms, we get many innovative products and more and more combinations of terms. Let's give some examples of innovative products with combined contract terms.
Example 8 Innovative products with increased combination of contract terms Many convertible bonds are composed of bonds plus convertible rights, callable rights and callable rights. Short-term bonds that can be resold and extended include terms such as resale and extension; The holder of convertible convertible preferred shares can choose to convert preferred shares into common shares, and the issuer can choose to convert them into convertible bonds; At present, income option bills include three types of clauses, such as callable, resolable and convertible.