By Andrew M. Chisholm
Derivatives are all around the smooth international and it is vital for everybody in banking, funding and finance to have an outstanding realizing of the topic. Derivatives Demystified presents a step by step advisor to the topic, permitting the reader to have an excellent, operating knowing of key by-product products.
Adopting a hugely obtainable procedure, the writer explains spinoff items in trouble-free phrases and with out the advanced arithmetic that underlie the topic, concentrating on functional purposes, case stories and examples of the way the goods are used to unravel real-world difficulties. Derivatives Demystified follows a series that's designed to teach that, even though there are numerous purposes of derivatives, there are just a small variety of simple construction blocks, specifically forwards and futures, swaps and ideas. The booklet indicates how every one construction block is utilized to diverse markets and to the answer of varied possibility administration and buying and selling problems.
This re-creation might be absolutely revised to mirror the numerous alterations the derivatives markets have obvious over the past 3 years. New fabric will comprise a complete heritage of derivatives, top as much as their use and abuse within the present credits crisis. it is going to additionally characteristic new chapters on rules and keep an eye on of derivatives, commodity derivatives, credits derivatives and based items and new by-product markets together with inflation associated and coverage associated products.
Derivatives Demystified is vital analyzing for everybody who operates within the monetary markets or in the company atmosphere who calls for an excellent knowing of those vital monetary tools.
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Additional info for Derivatives Demystified: A Step-by-Step Guide to Forwards, Futures, Swaps and Options
The examples from recent history in the next section illustrate the fact that such dangers are not illusory. The products discussed here, and the issues raised, are explored in more detail in the later chapters of this book. LESSONS FROM RECENT HISTORY This section outlines some of the more notorious episodes from the recent history of the derivatives markets. At the time of writing (early 2010), legislators and regulators are wrestling with understanding the role derivative products played in such events, and in particular in the global ‘credit crunch’ which started in 2007/8.
TEMPERATURE-LINKED DERIVATIVES The most widely used weather contracts are linked to temperature. CME lists a series of futures and options based on the average temperatures over a month or a season for various cities in the US and overseas. In the winter months the exchange constructs a Heating Degree Day (HDD) index, and in the summer months a Cooling Degree Day (CDD) index. With the contracts for US cities that cover a one-month period, an HDD index measures the extent to which the average temperature each day in the month in a city is below a benchmark level of 65◦ F.
In many cases the fair or theoretical forward price can be determined through a cash-andcarry calculation. This is based on what it would cost the seller of the forward to cover his or her risks on the deal by buying the asset in the cash market and holding or ‘carrying’ it to deliver on the date speciﬁed in the forward contract. If it is possible to trade a forward contract above or below the fair price then (subject to transaction costs) it may be possible to construct proﬁtable arbitrage transactions.