CFA Notes - Derivative

Note

（I）Types of Derivatives

i. Forward Commitments

Class of derivatives that provides the ability to lock in a price to transact in the future at a previously agreed-upon price.

ii. Contingent Claims

Derivatives in which the payoffs occur if a specific event occurs; generally referred to as an option.

iii. Hybirds

Derivatives combines two or more different fundamental instruments. For example, options can be combined bonds to form either callable bonds or convertible bonds. Options can be combined with futures to obtain option on futures.

（II）Types of forward commitments

i. Forward

（a）Definition

A forward contract is an over-the-counter derivative contract in which two parties agree that one party, the buyer, will purchase an underlying asset from the other party, the seller, at a later date at a fixed price they agree on when the contract is signed.

（b）Underlying asset

Financial asset

fixed-income securities, equity, currency

Physical asset

commodity

Other

interest rate, credit, other-derivative etc.

（c）Characteristic

1. OTC-traded;
2. Customized contract;
3. Little or no regulated;
4. Default risk;
5. Settlement at expiration

ii. Futures

（a）Definition

A futures contract is a standardized derivate contract created and traded on a futures exchange. It is a legal agreement to buy or sell something at a predetermined price at a specified time in the future.

（b）Characteristic

1. Exchange-traded;
2. Standardized;
3. Mark to market/daily settlement;
4. Margin;
5. No default risk

iii. Swap

A swap contract is an over-the-counter derivate contract in which two parties agree to exchange a series of cash flows whereby one party pays a variable series that will be determined by an underlying asset or rate and the other party pays either (1) a variable series determined by a different underlying asset or rate or (2) a fixed series.

（b）Characteristic

1. Customized;
2. Not traded in any organized secondary market;
3. Largely unregulated;
4. Default risk is a concern;
5. Most participants are large institutions;
6. Difficult to alter or terminate

（III）Option

i. Definition

An option is a derivate contract in which one party, the buyer, pays a sum of money to the other party, the seller or writer, and receives the right to either buy or sell an underlying asset at a fixed price eith on a specific expiration date or at any time prior to the expiration date.

ii. Characteristic

1. Contingent claims;
2. OTC or exchange traded;
3. An option is a right, but not an obligation;
4. Default in options is possible only from the short to the long

iii. Classification

（a）Call option

A call is an option granting the right to buy the underlying.

认购期权；看涨期权

（b）Put Option

A put is an option granting the right to sell the underlying.

认沽期权；看跌期权

（c）American option

（d）European option

（e）Bermudan option

iv. Exercise Price

The fixed price at which the underlying asset can be purchased is called the exercise price (also called the "strick price", the "strike," or the "striking price").

v. Option Premium

The buyer pays the writer a sum of money called the option premium, or just the premium.

vi.

（IV）The concept of Futures Margin

i. Margin

1. 保障金账户；
2. 交易账户

（a）Futures Margin Accounts

1. Both parties deposit a required minimum sum of money, but the remainder of the price is not borrowed.
2. Required margin is lower. Typically less than $10\%$

（b）Equity Margin Accounts

1. An investor deposits part of the cost of the stock and borrows the remainder at a rate of interest.
2. Required margin is higher.

（c）Initial Margin

Both parties deposit a required minimum sum of money when the contract is initiated.

（d）Maintenance Margin

The amount of money that must maintain in the margin account after the trade is initiated.

（e）Margin Call

A request to deposit enough good funds to bring the margin account balance up to the inital margin when it is below the mainenance margin.

ii. Mark-to-Market

（a）Mark-to-Market

Daily settlement of gains and losses to margin account according to the settlement price.

（b）Settlement Price

An average of the final futures trades of the day.
结算价一般是最后一段时间交易的均价。

（V）The Sutructure of Derivative Markets

i. Derivative

A derivatives is a financial instrument that derives its performance from the performance of an underlying asset. A derivate is created as a contract between two parties, the buyer and the seller.

The Long Position

多头头寸，Buyer, Holder

The Short Position

空头头寸，Seller, Writer

ii. The Sutructure of Derivative Markets

derivatives instruments are created and traded either on an exchange or on the OTC market. Exchange-traded derivates are standardized, whereas OTC derivatives are customized.

iii. Exchange-traded Markets

交易所场内交易市场

（a）Characteristic

1. Standerdized;
2. No default risk(guaranteed by the clearing house);
3. Regulated;
4. Transparent

（b）Traded Type

1. Futures;
2. Some options

vi. Over-the-counter(OTC) Markets

场外交易市场

（a）Characteristic

1. Customized;
2. Default risk - counterparty risk;
3. Unregulated;
4. Less transparent

（b）Traded Type

1. Forward;
2. Swap;
3. Some options