Derivative trading makes it possible to transfer risk and to discover fair price by arbitrage mechanism. Consequently, it gives a much benefit to the market and economy growth. Specifically, the introduction of derivatives market and innovation of the products in the derivatives market becomes a standard instrument to risk management. By transferring risk from risk- averse investors to risk-love investors, market participants enable to expand their trading volume, and hence would contribute develop the financial system and the macro economy.
Also, derivatives trading may make a complete the capital market. If, in a market, there is an information asymmetry or market friction, then arbitrage strategies using derivatives give a much opportunity to get profit and hence discover the fair price of product. Therefore it helps to capture the information that is not easily available and hence converge to complete the financial market.
On the other hand, derivatives trading may result in negative consequences. Many finance researchers investigate the following topic: (1) Does futures and/...
Our first customer is investor from China who invested large sum of money into KKB’s stocks. He decided to hedge his portfolio and contacted us. We offered him European put option on KKB’s stocks which matures in 9 months with the strike price of $13,1 per GDR. To estimate how much we are to charge for put option, we used data taken from the website of London Stock Exchange (www.londonstockexchange.com), as KKB’s GDR is quoted on this stock exchange. Latest price of the GDR is $16,29 (on 18 April,2008). To calculate volatility we used historical prices of the stock in the interval from 1 January until 18 April, and it is equal to 47,98%. Having all these figures we used Black-Scholes formula and found out the price of put option, which is $0,79. We also checked it on DerivaGem program.
Caterpillar Inc. also faces the risk of its cash flow and earnings being affected by fluctuations in the exchange rates of currency, commodity prices, and interest rates. To control for this, the company’s Risk Management Policy ensures prudent management of interest rates, commodity prices, and exchange rates of foreign currency by allowing the use of derivative financial instruments. According to the policy, the derivative financial instruments are not supposed to be used for the purpose of speculation. In its pricing strategy, Caterpillar Inc. faces the risk of difficult shipping of its products. This risk can be encountered by offering its products on instalments and lease to its loyal customers (Caterpillar, Inc. (CAT), 2011).
In this paper, we discuss the effect of CSI 300 index futures trading on the Chinese stock market. Specifically, we focus on the two topics (1) price volatility and efficiency of market, and (2) the arbitrage trading
Pagnotta, E & Philippon, T. (2010). The Welfare Effects of Financial Innovation: High Frequency Trading in Equity Markets. Available: https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=SED2011&paper_id=1246. Last accessed 04/12/11.
...his fact is utilized by the investors to plot wining strategies. Furthermore, the evidence from this study suggests that it is not necessary to know predictable patterns and market inefficiency in order to implement profitable investing strategies. Taken together, these results suggest that investors are able to achieve higher returns and minimize transaction cost by adopting indexing strategy which mimics the market. The second major findings are the contrasting view of behavioral finance. Two decades ago, many financial economists supported the Efficient Market Hypothesis because of the forces of arbitrage. Today it can be realized that it was indeed a very naive view and the limits of arbitrage can result in substantial mispricing. Thus through this research it is understood that absence of profitable investment strategy does not infer the absence of mispricing.
The expanding global market has created both staggering wealth for some and the promise of it for others. Business is more competitive than ever before, and every business, financial or product-based, regardless of size or international presence is obligated to operate as efficiently as possible. A major factor in that efficient operation is to take advantage of every opportunity to maximize profits. Many multinational organizations have used derivatives for years in financial risk management activities. These same actions that can protect multinational organizations against interest rate futures and currency fluctuations can be used to create profits for those same organizations.
My formal learning of the financial industry began at McGill University where I am currently completing an undergraduate degree in Economics and Finance. At McGill, I was exposed to various segments of finance such as Investment Management, Real Estate Finance and Corporate finance. However, I am primarily interested in asset management, especially the use of derivatives to create structured investment products. The use of derivatives is a novel approach to investing and controlling for risk and requires significant mathematical skill. However, having topped my class in econometrics and statistics, I was able to develop a deeper understanding for these investment strategies.
According to Guay (1999) firms can reduce dramatically their risk by the means of derivatives. But in the same research he finds out that derivatives could be used either do increase or decrease risk. Guay (1999) undertakes an empirical examination of new derivative users in attempt to find out whether derivatives are used to reduce firm’s risk. The results show that firms use derivatives to hedge, not to speculate by increasing company’s risk. The investigation is conducted for a sample of 254 non-financial corporations starting using derivatives and the outcomes indicate that during this period the companies’ risk has declined with about...
After the financial crisis of the late 1990s, the demands for risk management tools have increased. The investors have been effectively utilizing such products as KOSPI 200 futures and options, 3-Year KTB futures and USD futures to meet their hedging needs.
The importance of the topic is including a reduction in the risk and losses. Hedging effectiveness improved portfolio risk/return. Hedging is one of the main functions provided by future market and also the reason for existence of future markets. The main purpose and benefit of hedging on the futures markets is to minimize possible revenue losses associated with the adverse cash price changes. The risk of price variability of an asset can be managed by mechanism of
A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Derivative products like futures and options are important instruments of price discovery, portfolio diversification and risk hedging. The current scenario shows that the volatility spillover between spot
...ting in hedging activities in the financial futures market companies are able to reduce the future risk of rising interest rates. By participating in the financial futures market companies are able to trade financial instruments now for a future date (Block & Hirt, 2005).
This assignment is concerned with your understanding of the key issues relative to portfolio analysis and investment. In completing this assignment you are to limit your scope to the US stock markets only. Use the Cybrary, the Internet, and course resources to write a 2-page essay which you will use with new clients of your financial planning business which addresses the following issues and/or practices:
Over the last couple of decades technological advancements greatly contributed to the creation of innovative financial instruments, platforms, and analyses. The field of quantities trading, which rely on mathematical computations in order to identify arbitrage and trading opportunities, has seen dramatic technological development. More specifically, this filed has been transformed by complex, automated, and rapid trading mechanisms. These mechanisms process large amounts of data and utilized rule-based programs to capture trading behaviors across financial markets, in short amount of time. A well-known example of such trading mechanism is algorithmic trading.
This paper will define and discuss five financial theories and how they impact business decisions made by financial managers. The theories will be the Modern Portfolio Theory, Tobin Separation Theorem, Equilibrium Theory, Arbitrage Pricing Theory (APT), and the Efficient Markets Hypothesis.