Derivatives

2019 ◽  
pp. 157-198
Author(s):  
Alan N. Rechtschaffen
Keyword(s):  
Interest Rates ◽  
Foreign Currency ◽  
Credit Derivatives ◽  
Counterparty Risk ◽  
Treasury Bonds ◽  
Over The Counter ◽  
Futures Options ◽  
Counterparty Credit Risk ◽  
Stock Indexes ◽  
Versus Exchange

Derivatives provide a means for shifting risk from one party to a counterparty that is more willing or better able to assume that risk. The counterparty's motivation for assuming that risk might be to manage its own risk or to enhance yield (make money). Derivatives transactions may be based on the value of foreign currency, U.S. Treasury bonds, stock indexes, or interest rates. There are four types of derivatives contracts: forwards, futures, swaps, and options. This chapter discusses the following: counterparty credit risk, over-the-counter versus exchange-traded derivatives, shifting risk, types of derivatives, reduction of counterparty risk, suitability as hedging instruments, distinction between forwards and futures, foreign exchange forwards and futures, options, characteristics of swaps, and credit derivatives.

Derivatives Markets

2019 ◽  
pp. 151-166
Author(s):  
Halil Kiymaz ◽  
Koray D. Simsek
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Credit Derivatives ◽  
Forward Rate ◽  
Fixed Income ◽  
Over The Counter ◽  
Interest Rate Options ◽  
Interest Rate Derivatives ◽  
Fixed Income Derivatives ◽  
Derivatives Markets

Interest rate derivatives markets have enjoyed substantial growth since the late 1990s. This chapter discusses the development of these markets since 2000 and introduces the most popular interest rate derivative instruments. Although forward rate agreements and interest rate swaps are important examples of over-the-counter (OTC) products, futures on interest rates and bonds are innovations of organized exchanges. Both OTC interest rate options and exchange-traded options on interest rate futures are discussed to illustrate an overlapping area of both types of derivatives markets. Participants in debt markets are also exposed to both interest rate and credit risk. To mitigate the latter risk, the OTC fixed income derivatives markets provide credit default swaps (CDSs). As credit derivatives are also a subset of fixed income derivatives, CDSs are discussed further.

Commodities, Futures, Options, and Swaps, 1970–92

2020 ◽  
pp. 57-79
Author(s):  
Ranald C. Michie
Keyword(s):  
Central Bank ◽  
Financial Markets ◽  
Exchange Rates ◽  
Interest Rates ◽  
Futures Contracts ◽  
Central Bank Intervention ◽  
Over The Counter ◽  
Bretton Woods ◽  
Futures Options ◽  
The Past

One of the most dynamic financial markets to appear after 1970 was the trading of derivatives. Prior to 1970 the fixed nature of both interest rates and exchange rates, because of government controls and central bank intervention, limited the need to cover risks in these areas. With the breakdown of the Bretton Woods system in the early 1970s both interest rates and exchange rates experienced rising volatility, forcing banks to turn to derivatives as one way to coping. Governments of countries also began relaxing the prohibition on the trading of futures contracts that had been introduced in the past as a way of coping with destabilizing speculation. The commodity exchanges responded to these opportunities by devising contracts that allowed users to cover risks in financial markets as had already been done for such products as wheat, copper, and, later, oil. Leading these developments were the Chicago commodity exchanges such as the Chicago Mercantile Exchange but numerous contracts were also traded in the Over-the-Counter (OTC) market, directly between banks or through interdealer brokers.

4 Trading Regulations

2020 ◽  
Author(s):  
Liebi Martin ◽  
Markham Jerry W ◽  
Brown-Hruska Sharon ◽  
De Carvalho Robalo Pedro ◽  
Meakin Hannah ◽  
...  
Keyword(s):  
Financial Services ◽  
Foreign Currency ◽  
Securities And Exchange Commission ◽  
European Economic Area ◽  
Forward Contracts ◽  
Futures Trading ◽  
Over The Counter ◽  
Futures Options ◽  
Commodity Futures Trading Commission ◽  
Market Infrastructure

This chapter focuses on trading regulations. Derivative trading in financial instruments on organized exchanges consists largely of the following instruments: futures, options, options on futures, and swaps. Those transactions are differentiated from ‘cash’ transactions and ‘forward’ contracts. Forward and cash contracts are traded in over-the-counter (OTC) markets, which are generally subject to the day-to-day oversight of a government financial services regulator. Nevertheless, OTC cash and forward transactions may not entirely be free of governmental restrictions. For example, in the US, the anti-manipulation prohibitions in the Commodity Exchange of 1936 (CEA) may be applied to trading in cash and forward contracts where they are effected in order to create artificial prices. Particular OTC derivative transactions involving retail customers in foreign currency are also subject to regulation by US authorities, including the Commodity Futures Trading Commission (CFTC), the Securities and Exchange Commission (SEC), and banking regulators. The purpose of those regulations is to protect unsophisticated retail customers from fraudulent business conduct and dealer failures. Meanwhile, the trading in OTC derivatives in the EU and the European Economic Area (EEA) is regulated under the European Market Infrastructure Regulation (EMIR) as amended by EMIR Refit.

PRICING COUNTERPARTY RISK INCLUDING COLLATERALIZATION, NETTING RULES, RE-HYPOTHECATION AND WRONG-WAY RISK

2013 ◽  
Vol 16 (02) ◽  
pp. 1350007 ◽  
Author(s):  
DAMIANO BRIGO ◽  
AGOSTINO CAPPONI ◽  
ANDREA PALLAVICINI ◽  
VASILEIOS PAPATHEODOROU
Keyword(s):  
Interest Rate ◽  
Credit Derivatives ◽  
Credit Default Swaps ◽  
Credit Spread ◽  
Counterparty Risk ◽  
Default Correlation ◽  
Dynamical Models ◽  
Credit Default ◽  
The Impact

This article is concerned with the arbitrage-free valuation of bilateral counterparty risk through stochastic dynamical models when collateral is included, with possible rehypothecation. The payout of claims is modified to account for collateral margining in agreement with International Swap and Derivatives Association (ISDA) documentation. The analysis is specialized to interest-rate and credit derivatives. In particular, credit default swaps are considered to show that a perfect collateralization cannot be achieved under default correlation. Interest rate and credit spread volatilities are fully accounted for, as is the impact of re-hypothecation, collateral margining frequency, and dependencies.

DOLARIZATION OF THE FINANCIAL MARKET OF UKRAINE: CAUSES, EVOLUTION, CONSEQUENCES

2021 ◽  
Vol 1 (21(49)) ◽  
pp. 56-66
Author(s):  
Ihor Krupka
Keyword(s):  
Interest Rates ◽  
Financial Market ◽  
Foreign Currency ◽  
Banking System ◽  
Market Potential ◽  
National Currency ◽  
Foreign Banks ◽  
Stable Operation ◽  
Negative Consequences ◽  
International Financial Market

The purpose of the article is to assess the level of domestic financial market dollarization, find out the causes of this economic phenomenon, trace its evolution and identify current features, substantiate proposals to minimize the negative consequences for the financial market and the economy in general. The methods of theoretical analysis, synthesis and generalization, analysis of statistical data and its graphical interpretation are used in the research. The results of the research showed that the main reasons for dollarization in Ukraine were high inflation and sharp fluctuations in the exchange rate of the national currency. In general, the dollarization of national financial markets occurs through the following channels: 1) borrowing on the international financial market; 2) the entrance of foreign banks to a domestic market; 3) investing abroad, when a national financial market is not sufficiently developed to create high-quality and highly liquid assets, dollarization provides rapid access to foreign financial assets and optimization of the profitability and risk structure of an investment portfolio; 4) the difference (spread) between interest rates in national and foreign currency. Based on the study of the domestic financial market, the following conclusions are made: 1) the level of Ukraine`s financial market dollarization in the aggregate and in terms of its separate segments is high; 2) this level poses a threat to the stable operation of financial intermediaries and the banking system in case of the national currency devaluation; 3) currency imbalance of assets and liabilities in the banking system has strongly decreased since 2008, but is still significant; 4) foreign currency is widely used by economic agents in the shadow sector of the economy. We consider the current dollarization level dangerous for the development of the country's financial system, and its reduction to a scientifically sound natural level should become one of the main tasks of the National Bank of Ukraine. Achieving the natural dollarization level and effective use of the domestic financial market potential will allow to intensify Ukraine's national economy development and promote integration into the international financial market and the global financial space.

scholarly journals Capital Gains Sensitivity of US BBB-Rated Debt to US Treasury Market: Markov-Switching Analyses

Complexity ◽  
2020 ◽  
Vol 2020 ◽  
pp. 1-13
Author(s):  
Mariya Gubareva ◽  
Ilias Chondrogiannis
Keyword(s):  
Business Cycles ◽  
Interest Rates ◽  
Capital Gains ◽  
Capital Gain ◽  
Bond Yields ◽  
Hedging Strategy ◽  
Treasury Bonds ◽  
Bond Portfolio ◽  
Policy Suggestions ◽  
The Relationship

We reexamine the relationship between credit spreads and interest rates from a capital gain perspective of bond portfolio. Capital gain sensitivity between US BBB-rated bonds and Treasury bonds is weak and positive in normal periods, but strong and negative during recessions. In the upward phase of business cycles, changes in interest rates are fully reflected in the bond yields, leaving spreads unchanged, while in the downward phase, rates and spreads move in opposite directions. This alternation between two distinct regimes reconciles a long-standing division in the literature. We then discuss the efficiency of shorting Treasury bonds as a hedging strategy and policy suggestions.

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