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Derivatives are financial instruments that derive their value from an underlying asset, such as
a stock, bond, or commodity. Options, futures, swaps, and forwards are examples of
derivatives. A derivative's worth is based on the value of the underlying asset.
The difference in the form risk: Debt instruments are typically considered less risky than
equity because they offer a fixed return and have a priority claim on the company's assets in
case of bankruptcy. Equity instruments are riskier than debt because they don't offer a fixed
return and their value can vary widely based on the performance of the underlying company.
Equity holdersare also lower on the priority list for getting their investment back in case of
bankruptcy (Investopedia.com 2023), which means they may lose all or part of their
investment. Derivatives are highly risky because their value is linked to the performance of
an underlying asset or group of assets. The market is highly leveraged.
Question 2:
2.1. Commercial paper (CP) : Commercial paper is a short-term debt instrument issued by
corporations to raise funds for short-term needs.
One example of Australian commercial paper is the Telstra Corporation Limited 90-day
commercial paper.
US CP Ford Motor Credit Company 90-day commercial paper.
Repurchase agreements (repos): Repos are short-term agreements between two parties in
which one party sells securities to the other party and agrees to buy them back at a later date.
Australian repos: The Reserve Bank of Australia (RBA) sells collateral at the Exchange
Settlement (ES) rate less 0.20% and buys collateral (if lending is done against securities)
at the ES rate (rba.gov.au 2022).At present RBA’s ES rate is at 3.5% and the overnight
repo rate is at 3.85% (rba.gov.au 2023).
US repos: The Federal Open Market Committee (FOMC) has directed the Open Market
Trading Desk (the Desk) at the Federal Reserve Bank of New York to conduct overnight
and term repo operations at least through April 2020 (newyorkfed.org 2020).
2.2. All the calculations bellow were calculated based on the semi-annual compounding
formula, with the data gathered from Bloomberg.com with the timestamp at 3/31/2023 and
given the par value is 100.
The Australia 2-year Bond has a coupon rate of 3.25 and yield at 2.94%. Thus, the price is
157 USD (figure 1).
Figure 1
The Australia 5-year Bond has a coupon rate of 2.25 and yield at 3.04% . Thus, the price is
189.6 USD (figure 2).
Figure 2
The Australia 10-year Bond has a coupon rate of 4.5 and yield at 3.29% . Thus, the price is
452.98 USD (figure 3).
Figure 3
The Australia 15-year Bond has a coupon rate of 3.25 and yield at 3.63% . Thus, the price is
431.67 USD (figure 4).
Figure 4
Question 3
3.1
- Vietnam: HNX
- Australia: ASX 200
- US: S&P 500
- EU: EURO STOXX 50
- FTSE 100
Figure 6.
According to the following figure the Banking industry is dominating the Vietnamese stock
market with 14 out of 30 companies with the largest market caps. This proves that the
Vietnamese market is very keen on improving the financial stability and the accessibility to
finance. However there are also some drawbacks when banking industry is too dominant,
such as concentration of wealth. A dominant banking industry can lead to concentration of
wealth and power in the hands of a few individuals or institutions. This concentration can
exacerbate inequality and may limit access to finance for certain segments of the population.
Question 4
4.1. Obligation: Futures contracts are binding agreements to buy or sell an asset at a
predetermined price on a specific date in the future.Options contracts give the buyer the right,
but not the obligation, to buy or sell an asset at a specified price on or before a particular date.
-Premium: Options contracts require the buyer to pay a premium upfront for the right to buy or
sell the asset, while futures contracts require no upfront payment.
-Flexibility: Options offer more flexibility than futures as buyers can choose not to exercise their
-right to buy or sell an asset, while futures contract holders must fulfill their contractual
obligations.
-Risk: Options offer limited risk, as buyers can only lose the premium they paid, while futures
can be risky, as buyers may be forced to buy or sell the underlying asset regardless of the market
price at the contract's expiration.
Examples of the main use of forward contracts include:
-Hedging: Companies often use forward contracts to protect against the risk of price fluctuations
in commodities or currencies.
-Speculation: Investors use forward contracts to speculate on the future price of an asset and
profit from any price differences.
4.2.
If you sell a call option at a price of 145 USD and the strike price is 50 USD, you are agreeing to
sell the underlying asset at a price of 50 USD per share if the option buyer chooses to exercise
the option. As the seller of the call option, you receive a premium of 145 USD per share for
taking on this obligation.
References
Repo and reverse repo agreements (no date) Repo and Reverse Repo Agreements - FEDERAL
RESERVE BANK of NEW YORK. Available at:
https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-
implementation/repo-reverse-repo-agreements (Accessed: April 1, 2023).
Reserve Bank Information & Transfer System - Reserve Bank of Australia (no date). Available
at: https://www.rba.gov.au/rits/info/pdf/ESA_Interest_Rates.pdf (Accessed: April 1, 2023).