Risk Management and Financial Institution Chapter 5 —— Trading in Financial Markets

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Risk Management and Financial Institution Chapter 5 —— Trading in Financial Markets

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• Trading的目的：

  • 风险管理
  • 套利
  • 满足客户需求
  • 投机

• Volcker rule in Dodd-Frank Act，防止了美国银行的交易行为

• 本章节的目的是描述银行使用的交易工具

• margin has now become an important feature of over‐the‐counter (OTC) markets as well

5.1 The Market 市场

• 两种常规市场用于交易金融工具：
  • exchange-traded market
  • over-the-counter market （OTC market）

5.1.1 Exchange- Traded Markets

• NYSE trade stocks

• CBOE & CME trade derivatives such as futures and options

• Now,electronic trading largely replace the open outcry system

• market makers 会促成交易 ，always prepared 头quote both bid price and an offer price

• Typically the exchange will specify an upper bound for the spread between a market maker’s bid and offer prices通常情况下，交易所会设置spread 的上限

5.1.2 OTC Markets

• Key advantage of OTC market is that the terms do not have to be specified,free to negotiate any mutually attrative deal
• OTC markets are typically much larger than exchange-traded market

5.2 Clearing Houses

• non-members have to be channeled through members for clearing

• some OTC trades have been cleared through clearing houses

• Regulations now require standardized derivatives between financial institutions to be cleared through CCPs

5.3 Long and Short Position in Assets

• The trades are sometimes referred to as spot trades because they lead to almost immediate (on the spot) delivery of the asset

• buying on margin,以购买的资产作为抵押，margin的balance是25%

5.3.1 Short Sales

• If, at any time while the contract is open, the broker runs out of shares to borrow, the investor is short‐squeezed and is forced to close out the position immediately, even if not ready to do so,空头挤压

• divident and interest必须支付给broker

• Short sale 的margin 一般是short 头寸的150%

• maintenance margin is 125%, it will be a margin call

• uptick rule :上涨抛空规则，只有证券价格在最近一段时间呈上升趋势才允许卖空

5.4 Derivatives Markets 衍生品市场

• 衍生品定义：A derivative is an instrument whose value depends on (or derives from) other more basic market variables

• the principal (or value of assets) underlying a derivatives transaction is not the same as its value 面值和价值不同

5.5 Plain Vanilla Derivatives 普通衍生品

• 包括远期，期货，互换，期权

5.5.1 Forward Contracts 远期

• 远期定义：forward contract is an agreement to buy an asset in the future for a certain price

• Forward contracts on foreign exchange are very popular

• 远期可以用来对冲外汇风险

• 远期的payoff，The valuation of forward contracts and the determination of forward prices are discussed in Appendix C

5.5.2 Futures Contracts

• Trade on a exchange, terms are standardized

• It is nearly always the party with the short position that has the right to initiate the delivery process and choose between the alternatives

• The futures price of an asset is usually very similar to its forward price

• 远期settle在交割日，futures settle daily，the timing of the realization of gains and losses is different for the two contracts

• The clearing house requires initial margin and variation margin from its members

• the exchange clearing house requires default fund (also known as a guaranty fund) contributions from its members

5.5.3 Swaps 互换

• Swaps now occupy a position of central importance in the over‐the‐counter derivatives market

• Swap 定义 ：A swap is an agreement between two companies to exchange cash flows in the future

• A forward contract can be viewed as a simple example of a swap一系列远期合约的组合

5.5.4 Options 期权

• Most of the options that are traded on exchanges are American

• 美式期权的大多数特性是从欧式期权特性中演绎而来

• 按照是否实值虚值分类：

  • at the money
  • out of the money
  • in the money

• In the United States, one stock option contract is a contract to buy or sell 100 shares

• There are four types of trades in options markets:

  • Buying a call
  • Selling a call
  • Buying a put
  • Selling a put

• Selling an option is also known as writing an option

5.5.5 Interest Rate Option 利率期货

• 交易种类：
  • cap ， 利率上限，It is a series of call options on a floating rate (usually LIBOR). If the floating rate is greater than the strike rate (also known as cap rate), there is a payoff equal to the excess of the floating rate over the cap rate, applied to a predetermined notional principal
  • floor ，is similarly a series of put options on floating rates.
  • swap option ， an option to enter into a swap at some future time where the fixed rate is the strike rate
    • pay the srike rate and receive LIBOR
    • Pay the LIBOR and receive strike rate

5.6 Non- Traditional Derivatives 非传统衍生品

5.6.1 weather derivatives

• 对冲天气风险
• 两个变量：
  • HDD：Heating degree days
  • CDD: Cooling degree days
  • A is the average of the highest and lowest temperature during the day at a specified weather station 最高与最低的平均值

• 典型的OTC天气衍生品是一个远期或者期权合约，payoff取决于累计HDD或者CDD

• Most weather derivatives contracts are entered into by energy producers and energy consumers

• CME now offers weather futures and options for many cities throughout the world. It also offers futures and options on hurricanes, frost, and snowfall

5.6.2 Oil Derivatives

• 日原油消耗量为9000万桶

• 10年固定价格供给合约在OTC市场很常见，swaps for a floating price

• 按照重力以及含硫量，原油有不同的等级

• 重要的benchmarks Brent crude oil and WTI

5.6.3 Natural Gas Derivatives 天然气衍生品

• demand for natural gas is seasonal and dependent on the weather
• 每月以大体一致的速度，交付一定数量的天然气

5.6.4 Electricity Derivatives 电力衍生品

• Electricity is an unusual commodity because it cannot easily be stored

• 电力需求与供应匹配后的额外电力，才能卖出

• The CME Group now trades a futures contract on the price of electricity, and there is an active over‐the‐counter market in forward contracts, options, and swaps

• A typical contract (exchange‐traded or over‐the‐counter) allows one side to receive a specified number of megawatt hours for a specified price at a specified location during a particular month

• swing option or take‐and‐pay option，a minimum and maximum for the amount of power that must be purchased at a certain price by the option holder is specified for each day during a month and for the month in total

5.7 Exotic Options and Structured Products

• 奇异期权及结构化产品
• 对于银行来说，利润更高
• 例如：
  • 亚式期权，结算价用平均价
  • 障碍期权，敲出和敲入，These are options that come into existence or disappear when the price of the underlying asset reaches a certain barrier
  • 一篮子期权， options to buy or sell a portfolio of assets rather than options on a single asset
  • 两值期权，options that provide a fixed dollar payoff, or a certain amount of the underlying asset
  • 复合期权，期权中的期权
  • 回望期权，对应的汇报与标的资产在过去一段时间的极大值与极小值有关

5.8 Risk Management Challenges

• must set up controls to ensure that derivatives are being used for intended purpose
• risk limits should be set and activities of traders should be monitored daily to ensure that the risk limits are adhere to