Derivative financial instruments: concepts, classification. Accounting for derivatives by investors Market in which derivatives are traded
Text: Nadezhda Mikhailova, Deputy Head of the Infrastructure Technologies Department of the Veles Capital Investment Company
From the mid-1970s, when derivatives trading began in the United States, to today the volume of the derivatives market has grown to a very significant size, and now it is not so easy to assess it. Thus, according to some data, the value of contracts for one calendar year is twice the US GNP, according to others - the existing volume of derivatives is about 10 times the volume of the world economy.
In Russia, trading in financial derivatives began in the mid-1990s, when the first exchange-traded futures and options appeared. Currently, the daily trading volume in the derivatives market section on the RTS is about 200 billion rubles. At the same time, the average daily turnover of transactions in shares and bonds on the MICEX is about 320 billion rubles a day. Thus, in Russia, in contrast to developed countries, the volume of transactions in securities is approximately one and a half to two times higher than the market for forward transactions.
What is a derivative
According to the definition international standards financial statements (IFRS-32), a derivative is a financial instrument (a contract that simultaneously gives rise to a financial asset for one company and a financial liability or equity instrument for another):
- whose value changes as a result of changes in the interest rate, security rate, commodity price, exchange rate, price index or rates, credit rating or credit index, other variable;
- which requires a small initial investment in comparison with other contracts, the rate of which reacts in the same way to changes in market conditions;
- settlements for which are carried out in the future.
The easiest way to define a derivative is to compare it with another financial equity or debt asset. Common features include reflection as an investment for an investor or a source of funds for an issuer, as well as the fact that derivatives, equity and debt assets are financial market instruments with which exchange and OTC transactions are made. But much more important for understanding the essence of a derivative are the fundamental differences between it and other assets.
The key features of the derivative are:
- its emergence as a deal between different participants;
- mandatory presence of an underlying asset in its basis.
In world practice, derivative financial instruments or derivatives are divided into two large groups: forward transactions and structured products.
Forward transactions (from the English derivative) - a contract providing, in accordance with its terms, for the parties to the contract, the exercise of rights and (or) the fulfillment of obligations associated with a change in the price of the underlying asset underlying this financial instrument, and leading to a positive or negative financial result for each party. Examples of forward transactions are futures, option, forward, swap.
A structured or structured product (from the English structured product) is a complex complex financial instrument, a financial strategy based on simpler basic financial instruments. Structured products, among other things, arose out of the need for companies to issue cheaper debt. Structured products can take many forms and are typically issued by banks and investment companies. By combining various financial instruments, they have non-standard characteristics and features. All of them are distinguished by the presence of a fixed period of validity. The structured products were first listed on US domestic exchanges in 1969. Examples of structured products are credit notes, OFBU.
Derivatives and structured products have several characteristics:
- existence of one or more underlying assets;
- one of the key investment goals is risk minimization associated with the peculiarities of the circulation of underlying assets (for example, the risk of price changes);
- the issuer, as a rule, are banks, stock exchanges, investment companies .
Types of derivatives
There are many features for classifying derivatives: by types of transactions, types of underlying assets, lifetimes, etc. But it is more correct to understand the essence of the difference between derivatives to divide them according to the purpose of creation. So, there are the following types of derivatives.
- Obligation derivatives certain action in the future. These include futures (a standard exchange-traded contract, which is based on the obligation of the seller and the buyer to make a transaction or netting in cash in relation to a specific asset) and forward (based on the seller's obligation to transfer the goods (underlying asset) to the buyer at a specified time in the contract) or to fulfill an alternative monetary obligation, and the buyer undertakes to accept and pay for this underlying asset, and / or under the terms of the contract, the parties have counterparts monetary obligations in the amount depending on the value of the indicator of the underlying asset at the time of fulfillment of obligations, in the manner and during the period or within the period established by the contract).
- Derivatives related to the right of one of the parties take certain actions in the future, which she can use or not at her discretion. Classic examples are an option (an agreement under which a potential buyer or potential seller obtains the right, but not an obligation, to buy or sell an asset (commodity, security) at a predetermined price at a specified moment in the future or within a specified period of time) and warrant (a security that gives the holder the right to buy a proportional number of shares at an agreed price within a certain period of time and, as a rule, at a higher than the current market price).
- Derivatives related to the obligation of the parties to execute the counter transaction in relation to the prisoner at the moment. Examples are repo transactions (an obligation to repurchase securities under set price) and swaps (a trade and financial exchange operation in the form of an exchange of various assets, in which the conclusion of a transaction to buy or sell securities or currency is accompanied by the conclusion of a counter transaction - a transaction to resell or buy the same product after a certain period on the same or different conditions) ...
- Derivatives related to the occurrence of certain obligations of the issuer when a certain event occurs in the future. For example, a credit default swap (an agreement whereby a buyer makes one-time or regular contributions(pays a premium) to the CDS issuer, which in turn undertakes to repay the loan issued by the buyer to a third party in the event that the debtor cannot repay the loan (third party default). The buyer receives a security - a kind of insurance for a previously issued loan or a purchased debt obligation. In case of default, the buyer transfers to the issuer debt securities (loan agreement, bonds, promissory notes), and in exchange receives from the issuer compensation for the amount of the debt plus all interest remaining until the maturity date).
- Packaged Management Derivatives certain assets. Almost all structured products can serve as an example. So, credit notes are an analogue of debt obligations, structured products, the underlying asset of which is issued loans and credits and (or) debt securities various issuers. OFBU is like mutual fund, it is related to control credit institution monetary funds at the expense of which the fund was formed.
Of course, the variety of types of derivatives is significant, and the above classification is rather arbitrary, since derivatives can be a fancy combination of their different types.
Examples of derivatives
Consider the opportunities and risks of an investor when buying two derivatives: an exchange-traded futures on the US dollar rate - Russian ruble, traded in the RTS derivatives market section, and a foreign OTC derivative - a note on threshold index parameters stock market Russia and Brazil.
Futures on the US dollar - Russian ruble rate is an exchange-traded contract of the derivatives market, which is a forward contract, the value of which changes on a daily basis depending on changes in the respective exchange rates. Respectively, cash the owner of the contract daily increase or decrease by the amount of the variation margin - a calculated value that reflects the change in the corresponding rate. An important difference in a futures transaction is that the amount of money paid for the contract - the collateral - is only about 10% of the contract value.
You can make transactions with this futures both for speculative purposes and to hedge the risk of changes in the exchange rate difference between the two currencies. Hedging is most often used when receipts and expenditures are expected in different currencies. At the same time, it is necessary to understand that the use of "leverage" significantly increases the investor's possible losses.
To carry out transactions with futures, an investor must conclude an agreement with a broker, and in a day he will be able to make transactions.
While Russian exchange-traded financial instruments are well known to Russian investors, we know foreign derivatives much worse. At the same time, the global financial markets provide a huge selection of various financial instruments. However, an investor should more carefully analyze not only possible profits, but also the risks associated with both the instrument itself and its issuer.
As an example, consider one of the models of a foreign derivative - a note for the threshold value of the parameters of the stock market indices in Russia and Brazil. This note assumes the receipt of funds at a certain period of time in the future in the event of the occurrence or non-occurrence of a specific event.
The investor buys the note, assuming that the joint growth of the values of the two indices will be a certain value. If after a given period, for example, 6 months, the growth of two indices will be a certain value, for example, 10% and exceed it, the investor will receive the sum of the note and the delta, calculated based on the percentage increase of the two indices. But if the market fell, the investor could get a smaller amount invested, and possibly lose everything.
The variety of foreign derivatives allows the investor to choose the investment strategy that is optimal for himself, since there are many notes, with included restrictions on the investor's possible losses up to 100% capital protection.
Notes can be roughly divided into three types.
- "Debt" instruments assuming payment invested funds and a certain income, calculated depending on changes in various market parameters. In this case, the investor has the right to a return on the investment amount and can receive income.
- Notes-features- a strategy for investing in a set of market instruments. Income can be higher than on "debt" notes, but the losses are not limited.
- Combination of a debt instrument in a note, when the investor's losses are limited, and notes-opportunities... Here, with a favorable development of events, the investor can receive a higher return than when investing in ordinary debt securities of the same level of risk. If the development of the market is unsuccessful for the investor, he does not lose the entire investment amount.
To conclude transactions with foreign derivatives, an investor must comply with the requirements established by laws and pass the procedure for being recognized as a qualified investor.
Legislative regulation
Operations with derivatives are carried out in almost all countries of the world, but to understand the specifics of state regulation of this market, one can cite the example of the United States and the European Union as regions where the development of the derivatives market is most widespread.
Due to the large debt burden of a number of countries and large companies, attempts are being made to develop measures for a more thorough analysis and regulation of this market.
Currently, the US is dominated by a system of self-regulation, and in most EU member states - a system of state regulation of the financial market. V Russian legislation there has been a trend towards strengthening government regulation of the derivatives market. Thus, the first steps were taken to identify forward transactions. However, the increased riskiness of transactions with derivatives has not yet been determined; accordingly, the criteria for assessing the level of risk have not been introduced.
In Russia, regulation is still mainly related to exchange market derivatives, the OTC market is not affected. At the same time, it is concentrated in the sphere of redistribution, but the very issue of derivatives is not taken into account at all. Unfortunately, this is not only a Russian, but also a global trend, because in order to issue a share on the stock exchange, you need to publish a prospectus, disclose the owners and financial indicators, go through audits, roadshows, etc., and nothing is required to issue a derivative.
Also, one of the important aspects of state regulation of transactions with foreign derivatives is the need to obtain the status of a qualified investor.
It should be noted that there are no restrictions on entering into transactions with Russian derivative financial instruments, both physical and legal entities... To conclude transactions on the exchange, they need to conclude an agreement with one of the Russian brokers - professional participants the securities market.
Taxation of operations with derivatives
According to clause 1 of Article 214.1 of the Tax Code of the Russian Federation, financial results from transactions in derivative financial instruments is determined separately from other securities, and profit or loss on exchange and OTC transactions is considered separately. Thus, income from operations with financial instruments of forward transactions is recognized as income from the sale of financial instruments of forward transactions received in tax period, including the amounts of variation margin and contract premium received. In this case, income from operations with the underlying asset of financial instruments of forward transactions is recognized as income received from the delivery of the underlying asset in the execution of such transactions. It is important to remember what income they are related to. Thus, income from operations with the underlying asset of financial instruments of forward transactions includes:
- to income from operations with securities if the underlying asset of the financial instruments of forward transactions are securities;
- to income from operations with financial instruments of forward transactions if the underlying asset of the financial instruments of forward transactions are other financial instruments of forward transactions;
- to other income of the taxpayer, depending on the type of underlying asset if the underlying asset of a financial instrument for forward transactions are not securities or financial instruments for forward transactions.
When making transactions with derivatives through a broker, the duty to perform the functions of a tax agent lies with him, he calculates the amount of tax and transfers it to the budget of the Russian Federation from the investor's funds. The investor must only submit a certificate in the form of 3-NDFL to the tax office at the place of residence until April 1 of the year following the reporting year.
Derivative financial instrument (derivative ) Is an instrument that provides a market participant with the opportunity to liquidate his contractual obligation to another participant by paying or receiving the monetary difference between this and the opposite obligation, without violating the terms of the contract. Financial character such an instrument arises from the inequality of these obligations, i.e. from the redistributive nature of relations between the parties to a derivative contract. Derived character of this financial instrument follows from the method of settlement of obligations, the essence of which is reduced to their offset without formal legal refusal to fulfill them.
Derivative financial instruments are products of the activities of financial intermediaries that, based on the needs of market entities and various existing financial mechanisms, create an instrument with characteristics more acceptable to meet the economic goals of consumers that the market asset does not have, which serves as the basis for this derivative. Such characteristics may relate to the conditions and timing of payment of income on financial liabilities, taxation issues, increasing liquidity and investment attractiveness, reducing transaction and agency costs, as well as other significant conditions.
The essence international market derivative financial instruments are most fully disclosed in those functions, which he performs.
The defining, general function of the international derivatives market is further development and improvement of the use of capital in its fictitious form, not functioning directly in the production process and not being a loan capital (credit). Derivative financial instruments both create fictitious capital and ensure its movement. Moreover, derivatives represent fictitious capital in its purest form. In other words, the emergence of derivative financial instruments was the result of active innovation activities associated with the development and expansion of the use of capital in its fictitious form.
The applied function of the international derivatives market has become financial risk management. Risk protection of underlying financial assets, which underlies the creation and operation of derivatives, dialectically determined an increase in the risk of their circulation. Accordingly, the constant attention of the participants is aimed at controlling and limiting new risks associated with the functioning of the derivatives themselves, including in credit, investment, foreign exchange and stock transactions. To fulfill this function of the international derivatives market, states are developing open standards of activity, participants in the international financial market are creating technical systems for regular risk assessment (solvency, liquidity, exchange rates, partner, etc.). The same purpose is served by analytical-historical and analytical-situational schemes for identifying and assessing the factors that determine risks.
Another applied function of the international derivatives market is carrying out arbitration and speculative operations through them.
Since derivative financial instruments are from the outset aimed at the possibility of offsetting opposing obligations, they are not just traditional futures contracts, but also special trading and settlement mechanisms. However, they get their names from the type of fixed-term contract.
Derivative financial instruments can be classify in the following way:
- 1) by types of fixed-term contracts,
on which the derivative is based (created):
- - futures contracts;
- - forward contracts;
- - option contracts;
- - swap contracts;
- - varieties of the above contracts;
- 2) by standardization
:
- - standard (futures and exchange options); non-standard (settlement forwards, OTC options,
- 3) by the period of existence
:
- - short-term (up to 1 year - as a rule, futures and exchange options, as well as settlement forwards);
- - long-term (for more than 1 year - settlement forwards, OTC options, swaps);
- 4) by type market relations
:
- - instruments based on the relationship (contract) of purchase and sale;
- - instruments based on other market agreements (loan agreements, crediting agreements);
- 5) under the terms of an urgent financial transaction
:
- - firm (transactions that are obligatory for unconditional execution - futures, forwards, swaps);
- - conditional (options);
- 6) by trading systems
:
- - exchange (futures and exchange options);
- - over-the-counter, or over-the-counter (all others);
- 7) by varieties of the quoted price of the underlying asset
:
- - interest;
- - currency;
- - stock;
- - index;
- 8) supply of underlying assets, if possible
:
- - supplied (commodity, currency, stock);
- - non-deliverable (interest, index contracts);
- 9) by the form of execution
:
- - contracts with the possibility of physical delivery of the underlying asset at the time of expiration;
- - settlement contracts (no physical delivery at all).
Market competition brings to life new derivative financial instruments. The latter in their most general form are nothing more than new types of agreements between market participants, a characteristic feature of which are various combinations of transaction terms:
- - a combination of assets, their quantitative and qualitative characteristics;
- - a variety of conditions and forms of settlements in terms of correlating the settlement time, payment flows and the reasons for their occurrence;
- - combination of deliverability and non-deliverability of real assets underlying derivatives;
- - the establishment of one or another procedure for fixing the price of the initial asset at the time of the conclusion of the contract and the procedure for correlating it with current market prices on the established settlement dates, etc.
In summary, the most characteristic features derivatives and their markets are as follows:
- replacement of the obligation to transfer (supply) a specific asset of the transaction to obligations to transfer capital;
- transformation of derivatives into the most important source of profit for the majority of financial and credit institutions (modern banks in some cases receive up to 90% of their profits from working in the markets of these instruments);
- the use of derivatives as the most important means of capital outflow, not so much nationally as internationally;
- multifunctional nature of the use of any derivative as a hedging instrument, speculation, arbitrage, etc .;
- the cross-sectoral nature of the use of the same derivative (at once very many market participants conducting their business in various sectors of the economy, in case of economic necessity, can use each type of derivatives).
The function of collecting information, summarizing and analyzing the international derivatives market assigned to the Bank for International Settlements. According to his classification, there are four asset type, to which or to which combination the derivative can be linked: foreign currency, shares; goods; interest rate on loans. The latter in the context of the international financial market are considered only in combination with the listed three financial assets. Feature of all the listed derivatives is that when buying or selling them, the parties exchange not so much assets as the risks inherent in these assets. At the same time, there are two main PFI type:
- – direct or outright contract - buying or selling without a corresponding cash transaction. Forward and swap are examples of outright trades;
- – option or premium deal - the right to buy or sell, receive or deliver property in accordance with established conditions. This right can be exercised or not - at the discretion of the owner of the contract. Failure to use the option leads to monetary losses.
Many monetary derivatives cannot be categorized as direct or option contracts because they are a combination of the two.
Let's consider in more detail derivatives of underlying assets.
Foreign exchange derivatives include forward contracts, currency swaps, vanilla options, and various exotic options (barrier and average). Foreign exchange derivatives are traded primarily in the over-the-counter market. The standard currency of their face value is the US dollar.
Equity derivatives are in most cases a retail investment product. A typical example is deposits indexed according to stock market conditions. At the time of withdrawal of the deposit (deposit), the depositor receives back the principal amount plus income on it, based on the growth of the stock index. OTC derivatives can exist for specific corporate securities, a stock basket, or a stock index. Equity index derivatives account for the bulk of this market segment. Most often, equity derivatives are tied to one of four indices: Dow Jones; S & P500; FTSE100; Nikkei 225.
Commodity derivatives. In the segment of commodity derivatives, the undisputed leadership behind contracts for crude oil. Contracts are typically traded by both corporations and governments (OPEC countries, for example). The high liquidity of the commodity derivatives market attracts a large number of speculators to this segment. Swaps and vanilla options are commonly used for commodity hedging. The second and third places are occupied by contracts for gold and aluminum.
Interest rate derivatives. This is the largest and most diverse part of the international derivatives market - up to 68% (Table 16.3).
Table 16.3
Classification of interest rate derivatives
Credit derivatives used in credit risk management strategies. They can complement or replace traditional risk management techniques such as portfolio diversification or credit limits... These are the only derivatives that are exclusively traded in the OTC market. The main types of credit derivatives are swaps on defaulted assets, credit options and total income swaps.
According to the British Banking Association, the volume of the credit derivatives segment reaches $ 600 billion. Its main participants are international banks. The main obstacle to the development of the credit derivatives segment in the international derivatives market is the lack of documentary standards, since there is no uniform legislation in the field of international lending in this market.
Forward contracts for short-term interest rates and bonds that are traded as standard products are called interest rate futures. A typical example is a 3-month interest rate futures contract LIBOR. It is known as short term futures. (short sterling futures). By entering into a futures contract, companies fix the size of their future debt or income from the future placement of funds on the deposit.
Forward Interest Agreement (forward rate agreement – FRA) is a contract for the exchange of payments on assets with a floating and a fixed rate. The calculation is based on the nominal amount of the contract, which is not actually exchanged. Suppose the two parties have entered into FRA for three months, and its execution begins in 5 months. After 5 months, one of the parties pays the other the difference between the fixed interest rate and the floating rate (usually LIBOR) at the rate of 3 months. FRA is widely used by banks to hedge interest rate risk, which arises from different duration (term) of assets and liabilities. Such contracts are traded exclusively in the OTC derivatives market and serve as the basis for many OTC interest rate derivatives.
Interest rate swap - one of the most common types of over-the-counter interest rate derivatives. It is a contract for the exchange of promissory notes at various periodic rates, each calculated in relation to a specific amount. Swap transactions allow the borrower to exchange fixed rate debt for floating rate debt and vice versa. Physically, the amount is not exchanged, only the transfer of interest payments takes place. Interest rate swaps are the same as FRA traded only on the OTC derivatives market.
Option on interest rate future is an option to buy or sell an interest rate futures at a specified price. They are traded exclusively on the exchange. The most popular options are short-term sterling futures, eurodollar and svrolibor.
Interest rate guarantee, cap, floor. Options on FRA are called "interest guarantee" (IRG) or percentage caplet (interest rate caplet). European call option on FRA or "borrower IRG " gives the borrower the right to fix the future maximum interest rate on the loan. Put option on FRA or "creditor IRG ", on the contrary, it allows the lender to fix a minimum future rate on the loan. An interest "ceiling" is a contract that provides, on the basis of an option, the payment of the difference between the floating interest rate on an asset and the maximum rate. In contrast, an interest rate “floor” guarantees the right to pay the difference between the floating rate on the asset and the agreed minimum rate. The combination of "ceiling" and "floor" is called "collar" (collar).
Swaption is a kind of swap option. It gives the buyer of the swaption the right to enter into an interest rate swap transaction on a specified date in the future at a fixed rate (strike rate) and on specific terms. An option is called a "recipient swaption" if it entitles you to receive fixed interest payments on the swap, and a "payer swaption" if it entitles you to pay fixed interest payments and receive floating payments. A large volume of various swaptions is traded on the international derivatives market. Basic options are three-month and one-year options for two-, five- and ten-year swaps; 15-year options on 15-year swaps.
Bond options. There are forwards and options on national government bonds that are traded in both organized and over-the-counter markets. Contracts for corporate bonds and Eurobonds are used in the OTC market.
A mix of classic and exotic contracts. The main characteristic difference between an OTC derivative and an exchange one is the non-standardness of the main parameters of the former, which allows it to be tailored to the individual needs of market participants. Thanks to this flexibility, it is possible to conclude OTC contracts with any form and timing of settlement and execution, as well as other conditions, going far beyond the standard conditions of existing exchange-traded derivatives contracts.
In this case, contracts are compared that are essentially the same, but only used by participants in either the exchange or the over-the-counter market. For example, forward and futures contracts are essentially the same type of forward contract. However, the first allows you to vary any contractual conditions, and the second allows its parties to agree only on the futures price, while any of its other parameters remain unchanged, standard.
In fact, the differences between exchange and OTC derivatives are not so much in the methods of fixing the parameters of a particular contract, as in the types of contracts used. The fact is that exchange trading covers only a relatively small range of assets, professional participants, has strict rules, etc. It is impossible to trade "everyone and everything" on the exchanges, and this limitation does not allow the exchange to embrace the entire market in terms of trading volumes, and a variety of assets, and by instruments, and by participants. The number of types of contracts used in OTC derivatives trading is many times greater than the number of types of exchange contracts. Moreover, OTC derivatives are based not only on contracts that are allowed by the legislation of the respective countries, but also on contracts that do not yet fit into the current market legislation. Therefore, they cannot have traditional legal (judicial) protection of the interests of one party to the contract in the event that the other party, for some reason, would suddenly violate the terms of the contract.
For example, the variety of OTC forwards includes both their varieties in terms of the types of initial assets, and completely new types of them, along with the classic form of the forward contract: contracts FRA (forward interest rate agreement) and contracts Fxa (forward exchange agreement).
Another example is the numerous types of option contracts. It is known that a standard exchange-traded option contract based on a classic option contract means that by paying a premium to the seller of the option, its buyer gets a choice. He can make a deal with the underlying asset of the option at a predetermined strike price (strike price) at any time before the expiration date of the contract (American option) or on the expiration date (European option) or refuse the deal. In a standard option, the strike price, the strike date and the transaction asset itself are fixed.
In OTC options contracts, any conditions can be changed in a variety of ways. Unlike classic option contracts, their new varieties are called "exotic". Exotic options contract may include, among other things:
- execution at several fixed points in time (Bermuda option);
- payment of the premium not at the time of the conclusion of the contract, but at the time of its expiration (Boston option or break forward);
- deferred commencement (forward start option);
- the use of another derivative financial instrument as the underlying asset (for example, swaptions (options on swaps), caps (options on caps), etc.);
- choice by the buyer (owner) at a specified moment of time what type this option will be: call or put (option with a choice, or an option on an option);
- setting the price level, upon reaching which the option is canceled or, on the contrary, is exercised (barrier options);
- payment on a fixed amount of money option (cash or nothing option);
- payment on the option of the full value of the asset (option "asset or nothing");
- determination of the dependence of the option payment on the maximum or minimum ("looking" option) or average ("Asian" option) price value of the underlying asset achieved during the life of the option contract;
- receipt by the buyer upon the expiration of the option's maximum intrinsic value, calculated for a certain day of his choice during this period, or receiving the same intrinsic value, but only on the date of its expiration;
- determination of the dependence of option payments on the prices of several basic securities ("basket" option);
- a payment that does not have a linear (proportional) relationship with the price of the underlying asset (increasing option);
- the payment of an option in a currency other than the currency of the original underlying asset.
You can endlessly combine the above features, as well as create any new characteristics of option contracts to meet the "exotic" needs of market actors.
Swap contracts based on either firm forward (forward) or conditional (option) contracts. Therefore, they also admit the existence of variations of the original construction with respect to its "typical" content (the latter provides for the payment of the difference in cash flows based on various forms of fixing exchange rates, interest rates, prices of stock and commodity assets). We can also talk about the varieties of swaps in terms of the underlying assets, which are even more numerous than in the case of options contracts. This is due to the fact that the latter differ to the greatest extent not by the type of asset (the bulk of options are on shares), but by the types of conditions, or structures, of over-the-counter option contracts. For swaps, the options for contract terms are not as plentiful as for exotic (OTC) options. Swaps, in particular, can allow the following "exotic" varieties:
- deferral of the commencement of their action (forward swaps);
- a combination of netting payments with exchanges of principal amounts of the transaction, if we are talking about different assets, for example, different currencies or different goods (securities);
- exchange of payments in one currency (even if they are related to asset prices in different currencies) or in two different currencies;
- amortizing the face value of the swap over time based on a fixed fixed schedule (amortized swap) or based on changes in a specific stock index (swap amortized on an index basis);
- extending the validity of the swap or canceling it (i.e. the presence of optional features), etc.
According to the IMF, exotic instruments currently account for about a third of the gross market value of all OTC derivatives. Most OTC derivatives are still based on classic forward or option contracts and differ little from their exchange-traded counterparts. However, for the convenience of the over-the-counter market, their main parameters are standardized in advance, or rather, typed, i.e. the feature itself remains standard, and its quantitative parameters can be changed in accordance with the requests of a particular client. All of this reflects the trend of blurring the distinction between exchange-traded and over-the-counter derivatives. However, the border between them cannot completely disappear due to the fact that all market transactions are unlikely to ever lose their individuality.
Turnover and dynamics of the international market for foreign exchange and interest rate derivatives hide the discrepancy in the development of these two segments: the market for foreign exchange instruments decreased in terms of turnover, while the turnover of the interest-rate derivatives market increased.
The downturn in the foreign exchange derivatives market is associated with low foreign exchange turnover in the spot segment of the financial market, which experienced significant changes in 2000-2005. A particularly significant factor was the introduction of the single European currency, which led to the narrowing of contracts in the currencies of the euro area countries. On the contrary, the upward trend in the interest rate swap market contributed to the growth in the volume of transactions in the interest rate instruments market, which was a consequence of changes in hedging and trading activities in the US stock market and the creation of a wide liquid market for interest rate swaps denominated in euros.
Despite the decrease in the number of instruments foreign exchange market, the turnover in this segment continues to exceed the turnover of the segment of interest-bearing instruments, mainly due to the short-term nature of the first type of contracts. However, if the market for interest rate instruments continues to develop at the current pace, it will soon catch up with the market for foreign exchange instruments.
Derivatives Use Ratings show a rapid expansion of the credit derivatives market. This market is growing rapidly due to diversification of instruments and improvements in market infrastructure. The decline observed in the turnover of the foreign exchange derivatives market varies greatly in terms of specific categories tools. Thus, the turnover of ordinary forward contracts and currency swaps declined slightly (by 9% over the past five years), while the turnover of foreign exchange options and foreign exchange swaps fell by 30% over the same period.
The expansion of the segment of interest rate contracts was caused by an upward trend in the interest rate swap market. The introduction of the euro has created a large and liquid market for euro-denominated swaps. The volume of trading in forward contracts also increased.
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Federal Agency for Education
Baikal State University of Economics and Law
Faculty of accelerated training
Department of Banking and Securities
Specialty 06.04 "Finance and Credit"
COURSERABOTA
in the discipline "Securities Market"
Derivative financial instruments: concept, classification
Executor:
student gr. UV-2-07
Rupasov Yuri Gennadievich
Supervisor:
Irkutsk, 2009
Content
- Introduction
- 1.1 Concept of derivatives
- 2.1 Futures contracts
- 2.2 Option contracts
- 2.3 Forward contracts
- 2.4 Interest rate swap
- 2.5 Depositary receipts
- Conclusion
- List of used literature
Introduction
"The attitude towards derivatives is akin to that of the leading players in the NFL. They are too relied upon and too often blamed for failure."
Jerry Corrigan, former president of the Federal Reserve Bank of New York.
Recently, derivative financial instruments have been on the front pages of international financial publications due to their direct relationship to the scandalous losses and collapse of a number of organizations of different sizes. But, despite this, they have been traded for centuries, and the global daily turnover in operations with these derivatives reaches billions of US dollars.
Derivatives are financial instruments based on other, simpler financial instruments. That is, the value of a financial derivative is dependent (derived) from the value of the underlying instrument. Typically, the underlying instrument is a cash-traded financial instrument such as a bond or stock.
For example, - an option gives its holder the right to buy or sell the shares underlying this option. Since a stock option simply cannot exist without the underlying stocks, it is derived from the stocks themselves. And since shares are a financial instrument, an option is a financial derivative.
Financial derivatives have been associated with two traditional social goods. First, financial derivatives are useful in terms of risk management. Second, the conclusion of transactions in financial derivatives leads to the setting of prices that can be observed and valued by the whole society, and this provides information to market observers about the real value of certain assets, as well as the direction of the future development of the economy. Therefore, the markets for transactions with financial derivatives are not only a place for risky speculative play, but also can bring real benefits to society through insurance and risk management.
Financial derivatives markets play a critical role in providing economic information to the public. The existence of financial derivatives increases the interest of players in conducting transactions, as well as the activity of concluding transactions with derivatives and cash market instruments. As a result of more public attention, the prices of both tend to approach their real value. Thus, entering into transactions with derivative financial instruments helps participants economic relations get accurate pricing information. And if the parties enter into transactions based on accurate prices, economic resources can be distributed more efficiently. In addition, even those who only monitor the state of the market receive information that is useful to them when concluding their own deals.
The purpose of this course work is to disclose the topic: financial derivatives: concepts, classification, - it will consider the main types of financial derivatives: futures, options, forwards, swaps and depositary receipts, as well as the history and development prospects of Russian derivatives.
1. Concept and purpose of derivative financial instruments
1.1 Concept of derivatives
A derivative financial instrument (derivative) is a financial contract between two or more parties that is based on the future value of an underlying asset. These instruments are called derivatives because their price depends on the value or the value of the underlying variable of the item (variable) underlying the contract. Derivatives were originally associated with commodities: rice, tulip bulbs, wheat.
Commodity products remain the underlying asset at the present time, but in addition to this, the underlying asset can be any financial indicators or financial instruments. There are many derivatives in the world based on different financial assets: debt instruments, interest rates, stock indices, instruments money market, currencies, and even other derivative contracts.
Nowadays, four main types of financial derivatives are widespread, which will be discussed in more detail in the work, these are:
forward contracts;
futures contracts (futures);
option contracts (options);
swaps.
A forward contract is a transaction in which the buyer and seller agree to deliver an asset (usually a commodity) of a certain quality and in a certain quantity on the date specified in the contract. Moreover, the price is either negotiated in advance, or at the time of delivery of the asset. An example of a forward contract: a buyer wants to buy a foreign car from a dealer, for this he sets the exact characteristics of his future car: color, trim, engine power, makes a deposit, and most importantly, the price for which the dealer will deliver this car to the buyer only after three months is negotiated ... What will happen in these three months - none of the forward's parties knows whether the price of foreign cars will decrease or, on the contrary, there will be an increase due to the government's revision of customs rates, it does not matter anymore - the price of the car is fixed in the forward contract between the buyer and the dealer. That is, the buyer acquired the right to buy a car in three months and has undertaken to complete this transaction. So - the purpose of the forward is to protect the parties from unwanted changes in the price of the underlying asset (in this case, the car).
Option contract - gives the right, but does not oblige to buy (sell) a certain underlying instrument or asset at a certain price, on a certain future date or before its occurrence. For obtaining such a right, the buyer pays it to the seller - a premium. For example, to buy a dream car worth 600,000 rubles, the buyer lacks a certain amount and, in addition, all the money for it must be paid on the day of purchase. Then the buyer offers the dealer a small amount of 15,000 rubles just for the dealer to keep this car for him for a week and not change the price for it, while the buyer draws up a loan for the missing amount for the purchase. Moreover, the amount of 15,000 rubles will go to the dealer, regardless of whether the buyer buys this car or not. Thus, an option contract is concluded between the dealer and the buyer. The buyer received the right to buy a car in a week, without the obligation to do so. Perhaps within a week there will be another dealer who will sell a similar car for 500,000 rubles, then the buyer simply will not exercise his option, and the cost of the car will be 500,000 + 15,000 = 615,000 rubles. As with a forward contract, the buyer protected himself from unwanted price changes or, in other words, hedged the risk.
A futures contract (futures) is a firm agreement between a seller and a buyer to buy and sell a certain asset at a fixed future date. Contract price, changing depending on external factors- fixed at the time of the transaction. Futures are usually traded on trading floors (exchanges) with standard terms of quality, quantity, delivery date. After a deal with a futures between a buyer and a seller has taken place, the price of this transaction becomes available to everyone (known), which is the main difference. futures contracts from forward, where prices are confidential. The purpose of futures contracts can be to generate speculative profits and / or to protect against unwanted fluctuations in the price of the underlying asset.
A swap is the simultaneous purchase and sale of the same underlying asset or liability for an equivalent amount, in which the exchange of financial terms will provide both parties to the transaction with a certain gain.
Derivatives are very important for risk management because they allow you to separate and limit risks. Derivatives are used to transfer elements of risk and thus can serve as some form of insurance.
The possibility of transferring risks entails for the parties to the contract the need to identify all associated risks before the contract is signed.
Derivatives primarily depend on what happens to the underlying asset, as they are derivatives. Thus, if the settlement price of a derivative is based on the cash price of a commodity, which changes daily, then the risks associated with this derivative will change daily.
It should be noted that derivative financial instruments have many varieties, for example, options can be call or put, swaps - interest rate, currency, asset swaps, commodities, which will be discussed in the next chapter.
2. Classification of financial derivatives
2.1 Futures contracts
The most popular and oldest of all financial derivatives are futures contracts. The beginnings of futures trading originated in Japan and were associated with the rice market. Landowners who received rent in kind as part of the rice harvest could not know in advance what the rice harvest would be, and coma, they constantly needed cash. Therefore, they began to deliver rice for storage to city warehouses - and sell warehouse receipts (rice coupons), which gave their owner the right to receive a certain amount of rice of a specified quality at some future date at an agreed price. As a result, landowners had a stable income and merchants were able to profit from the resale of coupons.
Currently, the underlying asset for futures can be different types assets: agricultural products (cotton, corn, meat), stocks (OJSC Gazprom, Yahoo, etc.), stock indices (RTS, MICEX, S&P, FTSE), bonds, foreign currency (dollar, yen, pound) bank deposits, oil , gold and other assets. Futures are standardized exchange-traded instruments that are traded only on specially organized markets (exchanges) by setting a free, competitive price in public trading.
Futures can be settlement or delivery contracts. The settlement of a settlement futures implies settlements between participants only in cash without physical delivery of the underlying asset (for example, an RTS index futures). A deliverable futures contract is characterized by the fact that on the date of execution, the buyer undertakes to purchase and the seller to sell the specified amount of the underlying asset (Urals oil futures). Delivery is carried out at the estimated price fixed on the last date of the auction.
Futures trading on the exchange is as follows. Before being admitted to trading, participants must transfer to their account in the clearing house of the exchange the funds from which the deposit and variation margin are formed, and after that they can start participating in the trading.
As security for obligations, futures traders are required to keep a certain amount of money in their checking account with the exchange's clearing house - a deposit margin. The clearing house acts as a guarantor for the execution of futures contracts. It is also a transfer agent for contracts that involve physical transfer. It ensures the timely delivery of the goods by the seller and the timely payment for them by the buyer. However, the vast majority of futures contracts are liquidated before the settlement date by buying or selling another contract (investors or speculators close their original positions by doing opposite trades). Standardized futures contracts have a number of features that are set by the exchange. These standardized elements of currency futures include:
unit or volume of the contract;
price quotation method;
minimum price change;
price limits;
deadlines;
a predetermined end date for trading;
settlement date;
collateral or margin requirements.
When the price of a futures changes during a trading session, the variation margin is calculated for each open position. So, if the futures price changes in favor of the participant, the variation margin is credited to his account, and vice versa, the variation margin is debited from the account if the market moves against the open position of the trading participant.
Buying a currency futures provides the buyer with a “long position” (position on forward trades in a bull market). Selling the futures provides the seller with a “short position” (a position on forward trades when playing a fall). For example, a Russian exporter concludes a contract for the sale of 1 million cubic meters. m. of gas to a German buyer with payment in US dollars. To hedge the risk associated with a likely decrease in the value of the dollar, the Russian exporter has the right to sell through a broker on the MICEX several futures contracts for the US dollar and later buy a futures contract for dollars with a similar settlement date. As a result, the previously opened "short" currency position is liquidated.
So, all futures contracts can be classified depending on the underlying asset for commodity and financial futures. And depending on the terms of delivery for settlement or delivery.
2.2 Option contracts
Commodity and stock options have been used by players for centuries. During the Tulip Mania in the 1730s, traders granted tulip growers the right to sell grown bulbs at a fixed minimum price. For this right, the manufacturer paid a certain amount. Traders also paid a fee to tulip growers for the right to buy a crop of bulbs at a fixed maximum price.
By the 20s of the nineteenth century, stock options appeared on the London Stock Exchange, and in the 60s in the United States there was already an over-the-counter market for commodity and stock options. Initially, exchange and OTC options trading was accompanied by numerous problems - refusals to fulfill contractual obligations, insufficient regulation, etc.
The emergence of stock trading in commodity options occurred only in the 1970s, a century later than commodity futures trading, and there has been a significant increase in options trading since the 1990s.
So, an option contract gives the right, but does not oblige, to buy (call option) or sell (put option) a certain underlying instrument at a certain price - the strike price - on a certain future date, or before its occurrence.
Like other derivatives, options are used by market participants to:
hedging and protection against adverse changes in the price of the underlying instrument;
speculation on the growth (decrease) of the market price of the underlying asset;
carrying out arbitrage operations in different markets and with different instruments.
Currently, there are exchange and OTC options on a wide range of commodities and financial instruments. There are four types of options:
Interest rate (options on interest rate futures; options on future interest rate agreements - interest rate guarantees; options on interest rate swaps - swaptions);
Currency (options for cash currency; options for currency futures);
Stock (stock options; options on index futures);
Commodity (options on physical commodities and on commodity futures).
The two main types of options are call and put, both of which can be bought and sold. That is, buy the right to buy the underlying asset - buy a call option, or sell the right to buy the underlying asset - sell a call. Similarly, you can buy the right to sell an underlying asset - buy a put or sell the right to sell an underlying asset - sell a put.
On one side of the trade is the option buyer (holder), and on the other side is the seller. The option holder decides to buy or sell in accordance with his right (to exercise the option), and the seller in this case must make a delivery, i.e. sell or buy according to a contract. To get the right to buy or sell the underlying instrument on the day of the option expiration (expiration day) or earlier - the buyer of the option must pay the seller a certain fee - a premium. It has two components: intrinsic value and time value. Intrinsic value is the difference between the current rate of the underlying asset and the strike price of an option. Time value is the difference between the amount of the premium and the intrinsic value. The longer the duration of the option contract, the greater the time value, since the seller's risk is greater, and, of course, more amount his awards.
If the holder does not exercise the option, then he simply "exits" from the transaction with the seller, losing the premium paid.
Option sellers are usually market makers (brokers, dealers) who rely on their knowledge of the derivatives market, which will minimize option risks, since option sellers actually bear almost unlimited risks, which is clearly shown below in Figures 2.1 - 2.4. ...
Figure 2.1 Buying a put option.
Figure 2.2 Buying a put option.
From Figures 2.1 and 2.2 it is clearly seen that at a strike of 60 conv. units, the loss of the buyer of these options in the event of an unfavorable market situation may be only 5 conv. units, and the profit is almost unlimited. But if you look at Figures 2.3 and 2.4 below, it is easy to understand that the loss of the seller of these options will be unlimited, and the maximum remuneration will be only 5 conv. units, (amount of the premium).
Figure 2.3 Selling a put option.
Figure 2.4 Selling the call option.
Establishing a price for a particular type of option depends on many factors, here are the main ones: the time to expiration of the option, the price of the underlying asset, the volatility of the underlying asset (the "volatility" of the price for the latter), and several more variable parameters, which are called "Greeks "because of their corresponding designations in Greek letters (delta, gamma, vega, theta, etc.). For further classification, let us note that if the price of the underlying asset is higher than the strike when the price of the call option is formed, then they say that the option is “in the money”, if less, then “out of the money”, and if equal to the strike, then “by money ". For a put option, the words greater and less in the previous definition simply need to be swapped.
A situation may arise when the seller of the option does not own the underlying instrument that he is selling - such an option is called uncovered ("naked"), and in the opposite case - a covered option.
One of the varieties of the call option is a warrant. A security that gives its owner the right to purchase a proportionate number of shares underlying it at a specified future date at a specified price, usually higher than the current market price. Warrants have a lot in common with call options, but their distinguishing feature is a longer time frame, sometimes years. In addition, warrants are issued by companies, while publicly traded call options are not issued by companies.
Options can also be classified depending on the name of the place where such options appeared:
American, its difference is that it gives the right to buy / sell the underlying asset on the day of expiration or before it occurs;
European, such an option gives the holder the right to buy / sell the underlying instrument only on the expiration day (most OTC options have a European style of execution);
An exotic option that has a more complex structure than a standard call or put and includes special elements or restrictions (for example, an Asian option, or a weather option).
To summarize the chapter on options, we classify options as follows:
by type of trade - exchange and over-the-counter;
by the type of option - "call" or "put";
for the underlying asset - currency, stocks, futures (the latter are, as it were, a derivative for a derivative);
by type of settlement - with or without premium payment;
by type of coating - with or without coating;
by the type of the underlying asset price - out of the money, in the money, and in the money;
by the type of option - European, American, exotic.
2.3 Forward contracts
A forward contract is a binding futures contract whereby the buyer and seller agree to deliver goods of a specified quality and quantity or currency at a specified date in the future. The price of the goods, exchange rate and other conditions are fixed at the time of the transaction.
Unlike futures contracts, forward transactions are not standardized. They are similar to futures contracts, but unlike futures contracts, forward contracts do not have standardized parameters for volume, product quality and delivery date. A forward contract is generally concluded for the purpose of making an actual sale or purchase of a related asset, or to insure a supplier or buyer against a possible adverse change in price. A forward contract implies the obligation of counterparties to fulfill their obligations, however, the parties are not insured against non-performance in the event of bankruptcy or bad faith of one of the parties to the transaction. Therefore, forward contracts are more often concluded, as a rule, between parties who know each other well, or, before concluding a contract, future partners thoroughly check each other's solvency and reputation. A forward contract can be concluded with the aim of playing on the difference in the market value of assets.
A person opening a long position expects an increase in the price of the underlying asset, and a person opening a short position expects a decrease in the price of the underlying asset. For example, an investor, having received shares under a forward contract at a discount, can sell them on the spot market at a higher spot price. The secondary market for forward contracts for most assets is underdeveloped, since by its characteristics a forward contract is a purely individual contract. The only exception is the forward foreign exchange market.
A forward contract is almost similar to a futures contract, although there are two significant differences between the two. First, the forward contract is negotiated between the two parties in such a way that they can reflect the individualized terms. Futures contracts are traded on an exchange. It is the exchange that sets all the terms of the contract, with the exception of the price, including the volume of the contract, delivery date, type of goods, etc. Second, the forward contract is not revalued every day in accordance with current market prices, as is the case with futures contracts. As a result, gains and losses on a forward contract are only revealed at the time the contract is realized, while holders of futures contracts must account for the rise and fall in the value of their contracts, as they are revalued at current market prices on the exchange. The advantage of a forward over a futures is that it can be tailored to the specific circumstances and needs of the parties.
There are several types of short-term forward contracts, such as "repo" and "reverse repo" transactions. "Repo" is an agreement between the parties to the transaction, where one party sells the other securities with the obligation to repurchase them from it after some time at a higher price. As a result of the transaction, one party actually receives a loan secured by securities. The interest for the loan is the difference in prices at which she sells and redeems securities. The second party's income is formed by the difference between the prices at which it first buys and then sells securities. Repo deals are short-term transactions ranging from overnight to several weeks. With the help of repo, a dealer can finance his position to purchase securities. There is the concept of "reverse repo". This is an agreement on the purchase of securities with the obligation to sell them in the future at a lower price. In this transaction, the person who buys securities at a higher price actually receives them on a loan secured by money. The second person who provides a loan in the form of securities receives income (interest on the loan) in the sum of the difference between the sale and redemption prices of the securities.
So, forward contacts are based on an agreement between two parties to deliver an asset (goods, securities, currency) at a certain time and at an agreed price, are over-the-counter instruments, and therefore can be assigned to a third party. This contract does not provide for the initial transfer of money, thus differing from spot transactions, which are carried out immediately on the exchange. Forward contracts solve two main tasks: they protect both the buyer and the seller from possible fluctuations in the price of the goods and give hope to the manufacturer of the goods that his goods will not remain unclaimed, and the buyer is sure that the goods will be delivered to him on time.
2.4 Interest rate swap
Interest rate swap - an agreement of the parties on the mutual exchange of interest payments calculated in one currency from the offered amount at predetermined interest rates for a certain period of time.
Since the swap is always an exchange, there are two opposite cash flows.
Interest rate swaps are used for the following purposes:
The ability to raise funds at a fixed rate when access to bond markets is not possible;
Raising funds at a rate lower than the current one on the bond market or the credit market;
Restructuring of the portfolio of liabilities without additional attraction of new funds or changes in the structure of the balance sheet;
Restructuring of the asset portfolio without additional investments;
Insurance of bank assets using swaps;
Insurance of bank liabilities using a swap.
Interest rate swap - consists in the exchange of a debt with a fixed interest rate for a liability with a floating rate. The persons participating in the swap exchange only interest payments, but not denominations. Payments are made in a single currency, and the parties, under the terms of the swap, undertake to exchange payments within several years (from two to fifteen). One party pays amounts that are calculated on the basis of a fixed interest rate of the denomination fixed in the contract, and the other party pays amounts according to a floating percentage of this denomination. LIBOR (London Interbank Offer Rate) is most often used as a floating rate in swaps. The person who makes the fixed payments on the swap is commonly referred to as the buyer of the swap. The person making floating payments is the seller of the swap. With the help of a swap, participating parties are able to exchange their fixed-interest liabilities for floating-rate liabilities and vice versa. The need for such an exchange may arise, for example, if the party issuing the firm interest expects interest rates to fall in the future. Then, by exchanging a fixed interest for a floating one, it can take off part of the financial burden of servicing the debt. A company that has issued liabilities at floating interest rates and expects interest rates to rise in the future will be able to avoid an increase in its debt service payments by exchanging floating interest for fixed interest.
In addition to interest rate swaps, there are many other types of swaps, such as:
Currency swap - represents the exchange of par and fixed interest in one currency for par and fixed interest in another currency;
Asset swap - consists in the exchange of assets in order to create a synthetic asset that would bring a higher yield;
A commodity swap is an exchange of streams of payments when one of the parties agrees to buy or sell a given commodity at a fixed price on certain dates, and the other party is willing to respectively sell or buy this commodity at the current market price on the same dates. The purpose of a commodity swap is to distribute price risk between the client and the financial intermediary.
2.5 Depositary receipts
At present, investments in the Russian economy by Western investors have significantly decreased, pursuing short-term goals and engaging in the reselling of securities or the provision of custody services for these securities. Very little is invested in real business related to the production or provision of services, which undoubtedly hinders the development of Russian business. Taking into account that many Russian enterprises wishing to obtain additional capital through the issuance of shares experience problems when placing them among Russian investors, as well as the fact that foreign investors present on the Russian market prefer to engage in short-term financial speculation, investment activities some Russian companies today it is acquiring a new quality. They are making attempts to independently penetrate the world capital market directly, bypassing Western investment companies operating in Russia. One of the ways to achieve this goal is to issue derivative securities for shares, the so-called depositary receipts.
A depositary receipt is a freely traded derivative security for shares of a foreign company deposited with a large depositary bank that issued receipts in the form of certificates or in uncertificated form.
In world practice, there are two types of depositary receipts:
ADR - American Depositary Receipts, which are admitted to circulation on the American stock market;
GDR - Global Depositary Receipts, transactions with which can be carried out in other countries.
Depositary receipts originated in the United States in 1927. Their appearance was caused by the prohibition of English legislation on the export of British shares abroad and the desire of Americans to speculate in British shares no matter what. The depositary receipts market began to develop actively in 1970-1980 following the integration of world capital. In the 1990s, the market experienced a real boom, which was partly triggered by falling interest rates and the search for opportunities for American investors to make money in the markets. developing countries.
Currently, over 1000 depositary receipts for shares of various issuers are traded on the world stock markets, the overwhelming majority of which are represented by companies from developing countries, as well as by Russian issuers.
Starting the development of the ADR (GDR.) Issuance program, companies pursue the following goals:
attracting additional capital for the implementation of investment projects;
creating an image among foreign and domestic investors, as depositary receipts for company shares are issued by a world-famous and reliable bank;
an increase in the market value of shares in the domestic market: due to an increase in demand for these shares;
expanding the circle of investors, attracting foreign portfolio investors.
The issuance of depositary receipts is also attractive for investors, whose benefits are obvious. They can diversify their portfolio more deeply by penetrating through depositary receipts to shares foreign companies... They also have the opportunity to get high income from the growth in the market value of shares of companies from developing countries and reduce investment risks due to the asynchronous development of stock markets in different countries.
Depositary receipts can be sponsored or non-sponsored.
Unsponsored ADRs are issued on the initiative of a major shareholder or a group of shareholders owning a significant number of the company's shares. The advantage of unsponsored ADRs is the relative ease of their issuance. The requirements of the US Securities and Exchange Commission for the shares against which unsponsored ADRs are issued are only to provide it with a package of documents confirming the full compliance of the issuer's company and its shares with the legislation in force in the issuer's country. The disadvantage of such receipts is that they can only be traded on the OTC market. (Unsponsored ADRs are not allowed to trade on exchanges and in the NASDAQ system).
Sponsored ADRs (or GDRs.) Are issued at the initiative of the issuer. There are three levels of programs for sponsored ADRs. Their main difference is whether they allow you to raise additional capital by issuing shares or not. The first two levels allow issuing receipts only against shares already in secondary circulation. The third level allows you to issue receipts for shares that are just undergoing an initial placement. The most attractive option for issuers is the issuance of third level receipts, which means a good chance of obtaining direct investments in hard currency.
Also, ADRs of the third level can be subdivided into receipts distributed by public subscription and limited ADRs, which are allowed to be placed only among a limited circle of investors. To issue third-level ADRs that will be placed through a public ferment, they must be submitted to the supervisory authority (in the US, this is the Securities and Exchange Commission) financial statements conforming to US standards accounting... Therefore, third level ADRs have the same rights as any American stocks that are publicly listed on the NASDAQ system, the New York and American stock exchanges.
The use of receipts, on the one hand, allows Russian enterprises (Vimpelcom, MTS, Wimm-Bill-Dann, Mechel, etc.) to gain access to foreign investments, on the other hand, this leads to the fact that the Russian stock market is increasingly becoming dependent on the behavior of foreign investors.
3. Derivative securities: their role and significance for Russia
3.1 Russian derivatives - history of emergence
With the development of market relations in Russia at the beginning of the 1990s, forward transactions also arose quite quickly - transactions for goods that are transferred by the seller to the ownership of the buyer on the terms of settlements and delivery agreed in advance by the parties in the future period established by the contract.
One of the first forward deals were grain deals concluded in June-July 1991 at MTB (Moscow Commodity Exchange) for the future harvest. In July 1991, Rosagrobirzh passed a deal to purchase a contract for grain mixtures for total amount 650,000 rubles. However, at that time forward transactions were developing very difficult in Russia, as there were no guarantees of their implementation. So, for example, by order of the Rostov authorities in 1991, a ban was established on the export of grain outside the region. As a result, a number of contracts concluded for MTB in June of the same year were disrupted.
Under the conditions of constant confrontation between different regions of the country, the conclusion of forward transactions was unprofitable. Nevertheless, the number and volumes nevertheless grew. On June 23, 1992, two record forward contracts for the supply of grain were concluded at the international food exchange: 100 thousand tons of food and 240 thousand tons of feed wheat for the amount of over 3 billion rubles. ... These were the first truly large forward contracts for a classic exchange commodity in the domestic exchange practice. On April 27, 1992, the Rossiyskiy Gaz exchange announced that it was starting to trade forward contracts.
The first mention in the press about the intentions to create a futures contract market in Russia (forwards with standard parameters) dates back to mid-1992. metals - MBCM and Metal Exchange - BM) to create a "contract" (meaning the futures market). A Coordination Committee was established. The following basic commodities were supposed to form the futures market: granulated sugar, second-class wheat, A-76 gasoline and aluminum ingots.
Other exchanges also announced the start of trading in futures contracts. Thus, the Sochi International Commodity and Stock Exchange held an open auction for the sale of futures for the delivery of Krasnodar tea. Lot size - 864 kg, delivery time 3 and 6 months. The total price of the two concluded contracts was 210,000 rubles.
Nevertheless, October 21, 1992 is considered the birthday of the standard contracts market in Russia. On this day, MTB held the first trading in currency futures. To begin with, MTB "launched" a trial contract for $ 10 (with delivery in two months). interest in trading and their results exceeded all expectations. During 30 minutes of the trading session, 60 deals were concluded, for which 235 contracts were sold. During the first month, trades were held once a week. In total, 694 contracts were concluded for MTB in October (just under $ 7,000).
Futures trading began to gain momentum at a very high rate. From mid-November, trading sessions on MTB began to be held 2 times a week. in addition, the exchange introduced a new contract for $ 1,000. In the first month of trading, only 42 new contracts were implemented, but after half a year, the turnover reached almost 2 thousand contracts per month ($ 2 million). On March 1, 1993, MTB introduced a contract for the German mark, and on June 15, for the US dollar index. Later in 1995, the size of the dollar contract was increased to 5 thousand US dollars, but this size of the contract turned out to be too large for the Russian market.
In 1993, MTB's turnover in the derivatives market amounted to $ 117 million. As a result of such a rapid development of the derivatives market, its share in the total volume of MTB operations increased from 60.4% in 1993 to 98.5% in 1994.
In addition to MTB, the largest exchange platforms for futures trading were RTSB, Moscow Central stock Exchange- MCSE and the Moscow Financial and Futures Exchange - the Moscow Stock Exchange, which began trading in September 1995. MTB and MCSE have achieved the most success in the area of currency futures, while the RTSB in the area of GKO futures trading. The Moscow Chamber of Commerce, created on the basis of the Exchange of Secondary Resources, and a number of regional exchanges also traded in currency derivatives. in addition to contracts for currency and government securities, futures for privatization checks (vouchers) were traded on Russian stock exchanges.
The peak of activity on futures exchanges was from the end of 1994 to the 1995 banking crisis. The volume of open positions on MTB, RTSB, and MCSE increased to 220 million dollars, and the volume of transactions per day in contracts for the US dollar - up to 130 million dollars. In January 1995, the daily turnover of the foreign exchange futures market on only one MTB approached the turnover of the largest foreign exchange spot exchange - the MICEX ($ 30-40 million a day, the volume of open positions - $ 70 million).
The MICEX itself entered the futures market only in 1996, when the activity of the derivatives market had already started to decline. On September 12, the exchange started trading USD 1,000 futures. and GKO (10 GKO) without physical delivery. Later, contracts were introduced for ordinary shares of RAO "UES of Russia" and NK "LUKOIL", as well as for the MICEX stock index. By August 1998, 6 types of contracts were traded on the MICEX. The last to be introduced was the dollar contract with a fixed minimum and maximum price. "Launched" on June 30, 1996, it was a futures in the form of settlements, and in its economic essence it was similar to options.
In addition to currency futures and futures contracts for other financial instruments, since the first half of the 1990s, exchanges have tried to organize trade in commodity futures. However, under conditions of strong inflation, when prices were rising, the commodity futures market could not develop. All attempts by Russian stock exchanges to establish trade in commodity futures were unsuccessful, although there were a lot of these attempts, and they were very persistent.
The first to start trading commodity futures was MTB. Trades in granulated sugar, introduced on the exchange, reached in April 1994 the volume equivalent to 3.6 thousand tons. On July 25, 1994, MTB also introduced wheat contracts. And although the volume of sold wheat futures in August 1994 was already equivalent in physical terms to 23.3 thousand tons, this type of futures contract lasted only half a year. Granted sugar futures trading has also ceased. MTB has tried several times to set up aluminum futures trading. The first contract with a volume of 20 tons, which turned out to be unsuccessful, was replaced by another, with a volume of only 150 kg., But they did not manage to establish trade.
Other exchanges also traded in commodity futures. Trading in three-month futures for non-ferrous metals was organized at the ICMM. Lumber futures trades were held at the Russian Agricultural Exchange. Scandium futures trading was very sluggish on the RTSB in 1994-95.
Thus, the Russian derivatives market, which emerged in 1992, developed mainly as a dollar futures market. However, in September 1995, the government introduced a "currency corridor". Since its presence significantly limited the amount of possible profit, currency futures ceased to be so attractive for investing free assets. the derivatives market began to shrink. Nevertheless, currency futures, among other contracts, remained the most preferred derivative. So, despite the existing "currency corridor", the dollar futures was the main instrument of the derivatives market on the MICEX, occupying 77% of the market in 1997 (22% were derivatives on GKOs, 1% - on other contracts), and in the crisis year of 1998 - almost 99%.
Unfortunately, the market for standard contracts in Russia turned out to be very vulnerable in relation to various financial crises that shook the country. "Black Tuesday" October 11, 1994, the banking crisis in August 1998 hit hard on derivatives trading.
I would like to note that at that time the speculative nature of the derivatives market largely determined the further events that led to the crisis on October 5, 1994, futures trading on the MCSE was temporarily suspended due to the fact that the exchange chamber was unable to make mutual settlements between the trading participants. The situation was as follows, the founders of the MCSE reserved 400 shares of the Chamber, while independently evaluating them at 50 million rubles apiece - they contributed them as a guarantee for opening positions in the futures market. When fortune turned away from them, they had to sacrifice the "collateral", the announced price of which was significantly overstated in relation to the market price.
Of course, at present, the legislative regulation of the Russian derivatives market has gone far ahead, which will not allow repeating such a gross mistake as an independent assessment of the collateral, participation in trading by the organizer of the auction and others, but nevertheless there are always risks in any derivatives trade, about which we do not know yet and which may arise in the future.
October 5, 1994 went down in the history of the Russian futures market as "Black Tuesday", which froze the futures market for a week on another exchange - MTB. At that time, many participants conducted arbitration operations between the two platforms of the MCSE and MTB. Having failed to receive their winnings at the MCSE, the players were trapped when they could not cover their losses at another site - MTB. On the MCSE, futures trading resumed only in November 1994, but "the most valuable asset"financial market - investor confidence has been lost.
Having “withstood the blow” in 1994, the largest domestic platform for trading currency futures, collapsed in early 1996 due to the crisis in the interbank lending market that began in August 1995. Then MTB placed collateral in banks, which began to experience serious difficulties with their liquidity, and the exchange was unable to pay off its debts.
On June 1, 1998, the Russian Exchange (formerly RTSB) stopped trading on all contracts, due to the fact that several losing traders, who carried out transactions without real collateral, could not fulfill their obligations. Existing general warranty and insurance funds there was not enough to secure the obligations. Trading limits were opened by the clearing house on the basis of an oral order from the President of the Russian Exchange for certain bills of Rosresursinvest that were in his personal safe!
On June 15, 1998, trading was resumed, but they were held at minimal volumes. The exchange continued operations with derivatives after the August crisis in the following futures: on the US dollar rate, on shares of LUKOIL, Mosenergo, RAO UES, on the IBA index, on the euro against the US dollar, trading in the latter began in January 1999, the contract for the international S&P 500 index (31.5% of the market) was also traded. At the same time, trading was carried out by the broker offices themselves, using their own funds (dealer transactions). The turnover was just scanty compared to the present time.
In April 1999, the share of international futures fell markedly to 10%. In the summer of the same year, exotic contracts for elections to the State Duma of the Russian Federation became popular.
A month after the start of the crash on the Russian Exchange, the August 1998 crisis followed, which finally destabilized the activity of the Russian futures market, until 2000, when a certain "revival" of the Russian derivatives market was outlined.
Summing up this chapter, I would like to note that the formation of the Russian derivatives market was not easy, there were huge gaps in the legislative base, when making settlements, banal fraud and more. But despite all these problems, the derivatives market remains currently the most liquid and fastest growing market.
3.2 State and prospects of the derivatives market in Russia
Derivative financial instruments have gained significant popularity in market economies in the context of financial globalization. The growth of global financial markets has led to their integration and the expansion of financial instruments. If the emergence of financial derivatives was largely due to the period of application of currency restrictions in the leading developed countries, then their maximum use fell on the period of liberalization of the interstate movement of capital.
Over the past decades, an active process of development of the financial sector of the economy associated with its liberalization has been observed in the United States and other developed countries. Various investment and hedge funds have accumulated huge financial resources... All this plus progress in the field information resources led to the rapid development of the derivatives market in the West. The most actively traded financial instrument in the Western market is a futures contract. Derivatives markets are highly concentrated internationally.
In 2008, compared to the previous year, Russia experienced a rapid development of the derivatives market and the market for derivatives, namely:
rapid growth in the turnover of the derivatives market, especially in foreign exchange instruments (more than 5 times), commodity instruments and stock futures (more than 20 times);
an increase in the number of trading participants - banks that enter into transactions with derivatives and forward instruments, including for new types of underlying assets. (For example, if in 2007 only 11 banks indicated transactions with interest-bearing derivatives, in 2008 there were already more than 20);
the emergence of new types of derivatives, including for new types of underlying assets;
The distribution of the turnover of derivatives by underlying assets is more traditional for Russia (shown in a table below in the text) and reflects its historical realities: as before, the vast majority of transactions (almost 90%) are in foreign exchange derivatives, the next place is occupied by derivatives on stocks (8 , 5%) and interest-bearing instruments (2.8%).
This is followed by derivatives for bonds and commodities. It is especially noteworthy that at the turn of 2007-2008, credit derivatives appeared on the Russian market for the first time (despite the fact that it is one of the most widespread instruments in Western markets).
According to the Bank for International Settlements Bank for International Settlements (BIS), Basel, www.bis.org, in 2008 compared to 2007, the leader changed: instead of currency forwards, this place was taken by currency swaps, the share of which doubled: 51% in 2008 versus 25% in 2007. Their share also increased due to exchange-traded currency futures. The share of foreign exchange options is still small, although it increased from 1.3% to 1.9%, which is explained by the difficulties in taxation of transactions with this instrument. Forward currency instruments have become noticeably shorter in terms of maturity, as transactions in instruments with maturities of less than one month have grown significantly from 25.6% to 34.5%. The main instrument in currency pairs is the dollar-ruble, 73.8% in relation to other currency pairs, transactions with which are mainly carried out by banks on own funds about 85% in relation to client transactions, which is only 15%.
Table. Derivative transactions turnover in the Russian Federation
Underlying asset |
OTC instruments, (shares,%) |
Exchange instruments |
||
Futures |
||||
FX futures / derivatives FX |
||||
Interest |
||||
Equity derivatives |
||||
Commodity derivatives |
||||
Credit derivatives |
||||
Precious metal |
||||
As for the method of concluding transactions, it should be noted that more than 2/3 of transactions (70.7%) are concluded by banks directly with each other in bilateral transactions, and only 29.3% are concluded through intermediaries (exchanges and inter-dealer brokerage firms). The latter include the MICEX, GFI, NFBK, ICAP, Chicago Mercantile Exchange (CME), and others.
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What are derivative financial instruments (financial derivatives) in simple terms? How does the derivatives market work in 2019?
Derivatives market
If we explain what it is in simple terms, we can say that derivatives are a security for a security. The term is based on the English word derivative, which literally translates as "derived function"
Derivatives belong to the so-called secondary instruments... Secondary or derivative financial instruments are types of contracts that are based on the underlying (primary) asset.
The base of a derivative can be almost any product (oil, precious and non-ferrous metals, agricultural, chemical products), currencies of different countries, ordinary stocks, bonds, stock indices, indices of commodity baskets and other instruments. There are even derivatives on another derivative - an option on a futures, for example.
That is, derivatives are securities that provide their holder with the right to receive other types of assets after a certain period of time. Moreover, the price and requirements for these financial documents depend on the parameters of the underlying asset.
The derivatives market has much in common with the securities market and is based on the same principles and rules, although it also has its own characteristics.
In an extremely rare case, the purchase of a derivative security involves the delivery of an actual commodity or other asset. As a rule, all transactions are made in cashless form through the clearing procedure
What derivatives are there?
Classification by underlying asset
- Financial derivatives- contracts based on interest rates on bonds of the USA, Great Britain and other countries.
- Foreign exchange derivatives- contracts for currency pairs (euro / dollar, dollar / yen and other world currencies). Futures for the dollar / ruble pair are very popular on the Moscow Exchange.
- Index derivatives- contracts for stock indices such as S&P 500, Nasdaq 100, FTSE 100, and in Russia also futures for stock indices of the Moscow Exchange and the RTS.
- Equity derivatives... On the MICEX, among other things, futures for a number are traded Russian shares leading companies: LUKOIL, Rostelecom, etc.
- Commodity derivatives- contracts for energy resources, such as oil. On precious metals- gold, platinum, palladium, silver. For non-ferrous metals - aluminum, nickel. For agricultural products - wheat, soybeans, meat, coffee, cocoa and even orange juice concentrate.
Examples of derivatives
- futures and forward contracts;
- currency and interest rate swaps;
- options and swaptions;
- contracts for difference and future interest rate;
- warrants;
- depositary receipts;
- convertible bonds;
- credit derivatives.
Features of the derivatives market
Most derivatives are not recognized as securities by Russian legislation. The exception includes options that are issued by joint-stock company, and secondary financial instruments based on securities. These include depositary receipts, bond forward contracts, stock options.
Whereas primary assets are usually acquired to own the underlying asset, profit from subsequent sale or interest income, investments in derivatives are made to hedge investment risks.
For example, an agricultural producer insures himself against a loss of profit by concluding a futures contract in the spring for the supply of grain at a price that suits him. But he will sell the grain in the fall, after the harvest. Automakers hedge their risks by entering into the same agreements to obtain non-ferrous metals at a price they are comfortable with, but in the future.
However, the investment opportunities of derivatives are not limited to hedging. Buying them for the purpose of selling them for speculative purposes is one of the most popular strategies on the exchange. And, for example, futures, in addition to high profitability, are attracted by the opportunity, with not the largest investments, to get a leverage for a significant amount for free.
However, it should be borne in mind that all speculative transactions with secondary financial instruments are high-risk!
When choosing derivatives as a means of making a profit, an investor should balance his portfolio with more reliable securities with low risk.
Another caveat is that the number of derivative financial instruments may well be much larger than the volume of the underlying asset. So, the issuer's shares may be less than the number of futures contracts for them. Moreover, the issuing company of the primary financial instrument may have nothing to do with the creation of derivatives.
What are the benefits of derivatives?
The derivatives market is attractive to investors and has a number of advantages over other financial instruments.
Among the advantages of derivatives as a tool for making a profit are the following:
- Derivative financial instruments have a relatively low threshold for entering the market and provide an opportunity to start with minimal amounts.
- The ability to make a profit even in the face of a declining market.
- The ability to generate more profit and get it faster than owning stocks.
- Savings on transaction costs. For example, an investor does not need to pay for the storage of derivatives, while the brokerage fees for such contracts are also very low and can amount to several rubles.
Conclusion
Derivatives are an interesting and popular investment tool that allows you to make significant profits in a relatively short time. However, the rule is fully applicable to them: the higher the profitability, the more risks.
Diversification of the investment portfolio and the inclusion in it of more stable, but less profitable securities, allows these risks to be reduced
Derivative financial instrument (derivative)- is a financial instrument, the value, pricing and conditions of which are based on another financial instrument that is the base for it. In effect, a derivative is an agreement between two parties about the obligation or the right to deliver a specified asset at a specified time and price.
Most of the derivative financial instruments are not in accordance with the Federal Law “On the Securities Market”, with the exception of the issuer's option. However, there are often so-called derivative securities such as options, forwards, futures, swaps, etc.
Why are derivatives financial instruments needed?
The main purpose of using derivatives is the receipt of speculative profits, both temporary and material.
Derivatives are very important for risk management because they allow you to separate and limit risks. They are used to carry elements of risk and thus can serve as some form of insurance. The possibility of transferring risks entails for the parties to the contract the need to identify all associated risks before the contract is signed.
The purchase of a derivative financial instrument requires a small initial investment, in contrast to its underlying instrument, so often the number of such securities available on the market does not coincide with the actual amount of the underlying.
Types of derivatives
The classification of financial derivatives is based on two main features.
By type of underlying asset:
- Real goods: gold, oil, wheat, etc.
- Securities: stocks, bonds, bills of exchange and more.
- Currency.
- Indices.
- Statistical data such as key rates, inflation rate, etc.
By the type of a pending deal:
- Forward contract
A forward contract is a transaction in which the parties agree on delivery in specified period an asset of a certain quality and in a specific quantity. The underlying asset in forward contracts is real goods, the rate of which is negotiated in advance.
- Futures contract
A futures contract is an agreement under which a transaction must take place at a specific point in time at the market price on the date of execution of the contract. That is, if in a forward agreement the cost is fixed, then in the case of a futures it can change depending on market conditions. A prerequisite for futures contracts is only that the goods will be sold / bought at a specific point in time.
- Option contract
An option is the right, but not the obligation, to purchase or sell an asset at a fixed price before a specific date. That is, if the holder of shares of a certain enterprise announces his desire to sell them at a certain price, then the person interested in the purchase can conclude an option contact with the seller. According to his terms, the potential buyer transfers a certain amount of money to the seller, and the seller undertakes to sell the shares to the buyer at a set price.
However, such obligations of the seller remain valid only until the expiration of the period specified in the contract. If the buyer has not completed the transaction by the specified date, then the premium paid by him goes to the seller, who gets the right to sell the shares to anyone.
- Swap
A swap is a double financial transaction in which the underlying asset is bought and sold simultaneously on different terms. At its core, a swap is a speculative instrument and the only purpose of such actions is to gain profit from the difference in the price of contracts.
More on derivatives
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