Financial derivatives are widely used by institutional investors.
In the past century, with the intensification of global financial market risks, the demand for investors to manage risks by using derivatives has been increasing, and the derivatives markets such as options and futures have achieved rapid development. At present, many overseas investment institutions are using derivatives, including mutual funds, hedge funds, insurance funds, investment banks and commercial banks. The United States and the European Union have no specific restrictions on the types of funds (except monetary funds) involved in derivatives trading at the level of laws and regulations, and only require funds to explicitly involve derivatives investment strategies in the prospectus.
Among overseas institutional investors, hedge funds are the most widely used derivatives. 70%-80% of hedge funds use derivatives tools, among which the global macro strategy has the highest utilization rate of derivatives, accounting for 93%; The market-neutral strategy has the lowest utilization rate of derivatives, which is 53%. 57% hedge funds use stock derivatives and 13% hedge funds use commodity derivatives.
With the convergence of mutual funds and hedge funds in product forms and investment strategies, derivatives are gradually being widely used. At present, * * * funds have a high degree of participation in derivatives investment, but the investment ratio is low, especially for large and medium-sized funds. Morningstar data shows that about 53% of the outstanding mutual funds in the US market participate in stock index futures, but the investment ratio does not exceed 5%; The mid-cap fund participates in 60%, and the investment ratio does not exceed 2%; Small-cap funds participate in 23%, and the investment ratio does not exceed 1%. In addition, related research shows that the use rate of derivatives of mutual funds in Canada and Australia is relatively low, and the use of derivatives by mutual funds in European countries is increasing. In 2005, 60% of Spanish mutual funds used derivatives in their investments.
The research on the use of derivatives in insurance funds shows that options are the most commonly used derivatives tool for insurance funds in the United States, and 53.59% of the assets of insurance funds in American derivatives are used for options. The statistics of the British Insurance Association also show that options are the most commonly used derivatives of insurance funds, accounting for about 44.83% of the distribution of derivative funds. The use of options is mainly divided into holding assets and not holding assets but expecting to hold them.
Judging from the use of derivatives by the six most representative large investment banks in the world (JPMorgan Chase, Citigroup, Bank of America, HSBC, BNP Paribas and Deutsche Bank), interest rate derivatives account for the vast majority, which has basically remained above 60% since 200 1, among which swap contracts account for the largest proportion, and futures and options are also important derivatives used by investment banks.
Characteristics and functions of derivatives
To analyze the purpose of using derivatives, we first need to know the types and functions of derivatives. Common derivatives can be divided into five categories according to basic assets: first, stock market derivatives, products whose returns are linked to a single stock or index, such as stock index futures and individual stock options; Second, interest rate derivatives, the income is linked to a certain market interest rate, such as the interest rate of government bonds, in the specific form of government bond futures; Third, credit derivatives, whose income is linked to a certain credit event, such as credit default swaps (CDS); That detonated the subprime mortgage crisis in the United States in 2008); Fourth, foreign exchange derivatives, the income is linked to a certain foreign exchange trend, such as RMB-US dollar swap agreement; Fifth, commodity market derivatives, the income is linked to the price of a commodity, such as crude oil futures.
In addition, there are more special derivatives, such as derivatives linked to stock market volatility, carbon emission options, compound derivatives and so on.
The two most prominent characteristics of derivatives are: first, trading the current possible future results and determining the profit and loss at the future moment; The second is margin trading, which can be completely traded as long as a certain percentage of margin is paid, that is, there is a leverage effect. These two characteristics determine the main functions of derivatives: price discovery and risk management. Of course, derivatives play an important role and are often used for speculative arbitrage.
Derivatives can help realize risk management, but the first prerequisite for realizing this risk transfer function is that risks can be separated. In the final analysis, risk is still generated by price, and price fluctuation is risk. Derivatives can separate the price attribute from other ownership attributes, and risk management cannot be separated from derivatives.
The so-called price discovery is the process that the market adjusts commodity prices to achieve equilibrium prices. The formation of real market price needs a series of conditions, such as sufficient liquidity, orderly market and fair competition. , so that the information is centralized and transparent, and the price can truly reflect the relationship between supply and demand, thus forming a fair market price through competition. The derivatives market can meet these conditions. Derivatives and spot are closely linked through cross-market arbitrage. Because the derivatives market is usually more liquid and relatively convenient to trade, a lot of market information and new shocks are first reflected in the derivatives market, and then transmitted from the derivatives market to the spot market through cross-market arbitrage, thus realizing the function of price discovery.
Application of options in overseas funds
Among the derivatives used by overseas institutional investors, futures and options are the most commonly used. From the international experience, options are developing at an alarming rate in both developed and developing countries. According to the latest statistics of the Futures Association (FIA) on global derivatives exchanges, the total trading volume of global futures and options reached a new high in 20 16, reaching 25.22 billion lots. Options can effectively avoid market systemic risks, increase investors' cash flow, reduce the volatility of portfolio and improve the strategic effect of timing. In addition, options also have the functions of fluctuating trading, locking the stock trading price, innovative design of new products and so on.
In view of this, this paper mainly introduces the application of options by overseas institutional investors. The main strategy of using options is long-short strategy or hedging strategy. I hope that the option can keep the income and hedge the downside risks.
There are many kinds of funds. As an investment strategy, options are mainly used in hedge funds and mutual funds. For mutual funds, the primary investment goal is to outperform the index, so the static option strategy is often used. Commonly used options investment strategies mainly include protective put option strategy, call option strategy and neckline option combination strategy. Fund companies use the portfolio of protective put options, hoping to keep the gains from portfolio rise or spot rise, and at the same time, they can use put options to hedge the risk of sharp decline in the future, but they have to pay the option fee. It is worth noting that if the market expectation falls sharply and the volatility increases, the option premium will also rise, thus increasing the hedging cost. At this time, the fund manager may be more willing to adjust his position to reduce the risk, or he may choose a relatively cheap flat and slightly imaginary option with a term of about 3 months to reduce the hedging cost.
Covered call option strategy is the most commonly used option strategy for fund companies. The fund manager's main purpose is to exchange the future spot or the potential income of future positions's sharp rise for the protection buffer when the price falls. This strategy can effectively reduce losses or achieve excess returns in small fluctuation markets and small ups and downs markets. However, in the sharply rising market, some gains will be lost, while in the sharply falling market, the royalties collected from selling options are still not enough to make up for the potential losses. Some stock fund companies usually sell call options for about 3 months to combine strategies and choose flat or slightly imaginary option contracts, thus reducing the loss rate of returns when stocks rise.
When fund companies use neckline option portfolio strategy, they generally think that the market price (stock price) is limited, but considering the high hedging cost of using protective put option strategy, in this case, they are willing to give up the upper income and sell call options to collect option fees to hedge the cost of buying put options.
Obstacles affecting institutional investors' use of derivatives
Compared with individual investors who invest in derivatives for speculative arbitrage, institutional investors mainly use derivatives tools to change the scale of funds and manage the systemic risk of strategic portfolio.
The proportion of derivative investment in the net asset value of all funds is generally low, generally below 3%. The main reason is that institutional investors are not prepared to completely change the risk-return characteristics in order to optimize it. From the perspective of the market as a whole and the economy as a whole, the introduction of financial derivatives and the use of derivatives under the condition of complete risk control system have greatly improved the market's ability to resist risks, largely avoided the huge fluctuations in the market and minimized them. In fact, this is of great benefit to the stability of institutional investors' investment performance. Factors affecting institutional investors' use of derivatives are as follows:
Fund size
Generally speaking, large-scale fund companies and large-scale funds prefer to use financial derivatives, and the use of financial derivatives is deeper and wider than that of small-scale fund companies or funds. Big funds are more inclined to use financial derivatives than small funds. The main reason is that large funds have sufficient resources, can develop this business by training and hiring derivatives professionals, are better at using information, have economies of scale and have greater demand for hedging.
transaction cost
Compared with securities trading with the same amount, financial derivatives such as stock index futures are used to establish positions instead of directly buying and selling a large number of spot investment targets, and the handling fees and transaction taxes of financial derivatives such as stock index futures are lower than spot trading.
Liquidity of financial derivatives
The liquidity of derivatives is an important factor affecting institutional investors' use of financial derivatives. If the volume of derivatives launched is relatively large, trading is relatively active and liquidity is good, institutional investors tend to choose contract varieties with active trading and liquidity.
Political and economic uncertainty
When the politics and economy are unstable, the risks borne by the managed assets increase sharply, which in turn increases the hedging demand of the assets managed by institutions. At this moment, the demand for financial derivatives has also increased. Many mutual funds will enter the financial futures market only when the political or economic situation changes greatly, which will affect the stock market to fluctuate greatly.
Provisions of legal restrictions.
Financial derivatives are a double-edged sword. If used properly, it can effectively avoid market risks, reduce financing costs and improve profitability. If it is not used well, the high leverage of derivatives will also lead to huge losses for investors. If used improperly, it will amplify the market risk. Therefore, in the use of financial derivatives by funds and other institutions, countries have some legal provisions and restrictions, which have clear guidance on the use of financial derivatives and related information disclosure.
Looking back at the history of global financial development, such as 1997 Southeast Asian exchange rate crisis, 2008 American subprime mortgage crisis and several large-scale financial crises, derivatives have all appeared, which is also the reason why people from all walks of life in finance argue endlessly about the use of derivatives. How to use financial derivatives reasonably to prevent financial risks caused by excessive speculation is a problem that we should pay attention to.