Financial derivatives

Content
• Financial derivatives
– Definition
– Uses
– Kinds
– Application in Czech Republic
• OTC
• ETD
 Financial derivatives – Definition
• Are financial instruments, linked to a specific
financial instrument, indicator or commodity.

• Through which specific financial risks can be

traded in financial markets in their own right.

• Value infers from the price of the underlying

item (i.e. the reference price).
(OECD, 2011)
 Financial derivatives – Uses
• Are used for many purposes:
– Provide leverage or gearing
– Speculate and make a profit
– Hedge or mitigate risk in the underlying
– Obtain exposure to the underlying
– Create option ability
 Financial derivatives – Uses
• Hedging
– Insurance against loss
• Speculation
– Market price X Future price
• Arbitrage between markets
– Current buying price X Price specified in a futures
contract
• Risk management
 Financial derivatives – Uses
• Hedging
– a technique that attempts to reduce risk
– derivatives allow risk related to the price of the underlying
asset to be transferred from one party to another
• Speculation
– Speculators look to:
• buy an asset in the future at a low price according to a
derivative contract when the future market price is high
• to sell an asset in the future at a high price according to
a derivative contract when the future market price is
low
 Financial derivatives - Kinds
• The first generation derivatives
– FORWARD
• At a price specified today
– FUTURES
• At aprice on a specified future date
– OPTION
• Call option X Put option
– SWAP
• To exchange cash on or before a specified future date
 Financial derivatives - Kinds
• The second generation derivatives
– are combination of classical derivatives
• Future options
• Swaption
• Double options
• Caption
• Floortion
• Forwards swaps
– traded on OTC markets
Financial derivatives – Czech Republic
• since the early 1990´s
• beginning of trading OTC contracts
• 1993
– CSOB was the first bank which offer new services
to clients, and hedge against exchange rate risk by
financial options
• Czech legislation defines the derivatives in
three different definitions of different sets of
instruments.
 OTC
• OTC – over the counter derivatives
– contracts - traded (and privately negotiated)
directly between two parties, without going
through an exchange or other intermediary
– swaps, forward rate agreements, and exotic
options
– A market is the largest market for derivatives
 ETD
• Exchange-traded derivatives
• Traded via derivatives exchanges.
• Are traded as standardized contracts defined
by the exchange.
• Standardized by:
– underlying assets, time and location of delivery,
method of settlement
• Promotes market depth and liquidity.
 Questions?

Thank you for your attention!