Option Futures and Financial Derivatives Study Notes--Chapter 1 Introduction

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Financial derivatives are derived from financial primary products such as currency, interest rate, exchange rate, stocks and bonds. These financial primary products are used as trading objects, characterized by leveraged credit transactions, and for the purpose of avoiding risks, speculation or arbitrage. A financial contract reached by two or more parties. Financial derivatives have a very high degree of flexibility. The subprime mortgage crisis referred to in the 2007 financial crisis also involved financial derivatives. Because of this crisis, financial derivatives After 2007, more restrictions were imposed.

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1. Characteristics of financial derivatives

The volume of financial derivatives is huge.
It is generally several times that of stock transactions, accounting for 50% of the global transaction volume. In financial derivatives transactions, option transactions account for a large proportion, accounting for 50%-60%. Stock and stock index options Each accounts for half of the country.
Flexibility The underlying
variable of derivatives is often the price of a certain trading asset, which does not require physical delivery, and can also be shorted. The transaction is very flexible . Only large institutions with sufficient capital and professional and technical personnel can participate in it, resulting in the relative concentration of credit risk on these few institutions, so that the sudden bankruptcy or non-performance of an institution will affect the entire derivatives market. Causing a series of default events, thus triggering systemic risk.

2. Types and transactions involved in derivatives

1.1 Exchange market
 Exchange market
 Electronic exchange
 OTC market
1.2 Forward contract
 Explanation of terms:
① Forward contract: it is to buy or sell a certain product at an agreed price at a specified time in the future Contracts Forward contracts can be combined with spot contracts
② Spot contracts: Spot contracts refer to contracts that are about to buy or sell assets immediately. Forward contracts are often conducted between financial institutions or between financial institutions and their customers in the over-the-counter market transaction.
③ Long position: In the forward contract, the party who agrees to buy the asset at an agreed price at a certain point in the future is called holding a long position (long position, referred to as long position). ④ The other party in the forward contract agrees
to Selling assets at the same agreed price at a moment, this party is called holding a short position (short position, short position for short)
The role of forward contracts.

	如上图所示,银行或者金融机构当中,是即期和远期的合约并存的,即有即期交易员,也会有远期交易员.远期合约通常用来规避外汇风险.
远期合约的收益	
![在这里插入图片描述](https://img-blog.csdnimg.cn/c667d13250004d67aded0ff80ef5075b.png?x-oss-process=image/watermark,type_d3F5LXplbmhlaQ,shadow_50,text_Q1NETiBAd2VpeGluXzQ3Mzg3OTU5,size_13,color_FFFFFF,t_70,g_se,x_16#pic_center)

	K为合约的交割价格（delivery price），ST 为资产在合约到期时的市场价格，合约中的多头方必须以K的价格买入价值为ST

For the long side of the forward contract, the income per unit of contract is the asset here in ST-K. Similarly, for the short side of the forward contract, the income brought by the contract is K-ST

1.3 Futures contract
 Explanation of terms
Similar to forward contracts, futures contracts are also contracts to buy or sell a certain product at an agreed price at a specified time in the future
 The subject matter
includes various products and financial assets
 Price Determined by the relationship between supply and demand
Thinking questions: What is the difference between forward contracts and futures contracts?
Unlike forward contracts, futures contracts are traded on exchanges. To be able to trade, exchanges do some standardization on futures contracts. Both parties to a futures contract do not necessarily know the counterparty, and the exchange has set up a mechanism to ensure that both parties will fulfill their contractual commitments.
1.4 Option contract
 Explanation of terms The holder of
a call option
(call option) has the right to buy a certain asset at a certain price at a certain time in the future. The holder of a put
option
(put option) has the right to Selling an asset at a specific price at a specific time.
The specific price mentioned in the contract is called the exercise price or strike price; the
specific time referred to in the option contract is called the expiration date or maturity.
American option
means that the option holder can choose to exercise the option at any time before the expiration date; European
option
means that the option holder can only choose whether to exercise the option on the expiration dateOption
profit

Taking the par execution price as the decomposition point, the buyer's profit is unlimited

The buyer of an option is called a long position and the seller of an option is called a short
position However, it must be declared that this kind of hedging transaction only reduces the occurrence of risks, but it cannot guarantee that the profit effect of hedging is better than that of no hedging. The key point is to avoid risks. ② Use options for hedging through buying and selling Put/Call options to avoid risks ③ Compare the differences between the two due to the different products selected. The first one locks in risks through the price difference between buying and selling, and the second one can provide protection when the price is unfavorable. It can also provide profits when the price is favorable, but options need to pay service fees. Speculators (speculators) are different from hedgers. They do not have risk exposure themselves, but expect to build positions through price fluctuations ① Use futures to speculate through futures trading to lock in the price and earn spreads ② Use options to speculate through option trading ③ Comparison Futures may have greater risk of return than options, and the upper limit of the loss of options is the option fee. Things to pay attention to Because options and futures have certain leverage effects, compared with spot contracts, they can generate greater profits, of course, losses may also be higher, and the amount of losses and profits varies according to different products.

套利者（arbitrageur）
	套利者也是不拥有风险敞口的,他们通过组合不同的交易类型,来锁定无风险的收益.套利的机会可能出现在跨界的金融场景,涉及多种交易形式,套利的机会受供求关系的影响,套利的机会可能是短暂的,在信息流通顺畅的的交易场景下,套利的利润往往也比较低.

Example:
Below are several types of hedge funds and the trading strategies they often employ.
Stock long/short hedging
(long/short equities): The hedging portfolio includes buying stocks whose prices are undervalued by the market and selling stocks whose prices are overvalued by the market, so the overall market trend will have little impact on the portfolio.
Convertible Arbitrage
: Entering a long position in a convertible bond and a short position in the underlying stock, and managing the short position in the underlying stock in a dynamic fashion.
Stressed (high risk) bonds
(distressed securities): buy securities of companies on the verge of bankruptcy.
Emerging markets
: Invest in the bonds and stocks of companies in developing countries or emerging markets, or invest in the national debt of these countries.
Global
macro: Investing in transactions that reflect expected global macroeconomic trends.
Merger arbitrage
(merger arbitrage): deals after mergers and acquisitions are announced. When the M & A transaction is successful, it can achieve the purpose of profit.

# 机会和危险并存

历史上发生过很多因为高风险的投机交易导致巨额损失的情况,如法国兴业银行,08年次贷危机等等.衍生品因为其灵活性和杠杆作用,所能带来的高收益往往让人丧失理智,风险意识至关重要.