DERIVATIVES

DERIVATIVES

1. FUTURES

   • It is a contract between two parties who agree to, at a specified future date and at a certain price, exchange an asset, called an underlying asset, which can be physical, financial, real estate or raw material.
     • FEATURES
       • Futures are derivative financial products
       • As derivative products, their price varies depending on the underlying asset.
       • The conditions of the contracts are standardized in terms of nominal amount, purpose and expiration date.
       • They are traded in organized and controlled markets, so they can be bought and sold without waiting for the expiration date.
       • Both to buy and to sell futures, the participants must provide guarantees to the market, that is, an amount of money based on the open positions to avoid the counterparty risk mentioned above.
       • It is a product that can be sold without having to buy previously, this is what is known in the market as short positions.

2. OPTIONS

   • An option is a contract by which a buyer acquires, the right to buy or sell a given asset, at a future date or before that date
     • The options can be divided into several categories: According to the right granted:
       • • Call option: contract that grants the right to buy an asset; also called Purchase option.
       • • Put option: contract that grants the right to sell an asset. Also called put option.
       • According to the possibility of exercising them:
         • European Option: are those options (call or put) that can only be exercised on your expiration.
         • American Option: are those options (call or put) that can be exercised in any time prior to expiration
   • • The option buyer has the right, but not the obligation, to exercise the right to buy or sell the underlying asset.
   • • The option seller is obliged to satisfy the buyer's right if he requires it.
   • The underlying asset of an option can be of any type: stocks, commodities, bonds, etc

3. FORWARD

   • "The forward, or term contract is an agreement between a buyer and a seller to negotiate an asset at a future date. The price of the asset is set at the time the contract is drawn up. Forward contracts have a settlement date : all are settled at the end of the contract. Thus, whoever buys the underlying asset is positioned long, and whoever sells it, is short. And, like other derivatives, it is usually used to hedge the risk (especially the exchange rate) as a result of speculation. If the price of the underlying asset rises during the term of the forward, the buyer of the forward will have a profit, since they will be able to buy the underlying asset at a lower price and sell it directly in the market at a higher price The forward seller, on the other hand, will have a loss, since he is obliged to sell the asset at a lower price than the market price. However, if the price falls below the contract price (initial value), the result is opposite and the one who had the right to sell (at
     • "1- Forward contracts are carried out outside organized markets, that is, they are carried out in the OTC market (Over the Counter).
     • 2- They have great flexibility when negotiating in OTC markets, that is, the buyer and seller agree on the conditions and terms of the contract. In addition, they allow the establishment of hedges without requiring margin calls from a clearing house.
     • 3- OTC Market
     • 4-Contract between private parties, a forward operation that requires the buyer and the seller
     • 5- Size and sale without requirements, determined according to the transaction and the needs of the contracting parties
     • 6- Expiration, determined according to transaction, agreed between parties, between 3 days and 3 years
     • 7- Guarantee: credit rating of the counterparty
     • 8- Settlement, upon expiration of the contract
     • 9- Compliance method: Physical compliance, or (Delivery) and Financial compliance or (non delivery)
     • 10- Target audience: It is aimed at people and companies who wish to protect themselves from financial risks, natural or legal persons who must make future payments with foreign currencies, and Market speculators, who earn money if the price behaves in their favor
     • 11- It is beneficial for both parties at the beginning of the contract as it is not necessary for them to make any kind of disbursement.
     • 12- This mechanism can be implemented for a wide variety of foreign currencies "Currencies".

4. SWAPS

   • "A swap is an asset exchange contract, also called a financial swap, by which two companies agree to exchange future cash flows according to a pre-established formula. These are contracts made "" to measure "", in order to satisfy the specific needs of those who sign said contract. That is why they are regulated, like forwards, in unorganized OTC markets. Regarding their configuration, the swap contracts contain specifications on the currencies in which the exchange of flows will be made, the applicable interest rates and the dates on which each exchange will be made, as well as the formula that will be used for that purpose. The most common type of swap is that of interest rates, through which interest flows are exchanged in the same currency on certain previously agreed dates. The purpose of a swap is to convert a payment scheme into another of a different nature, according to the needs of the participants, who can be both retail clients, investors and large companies. "
     • 1- OTC Market
     • 2- Guarantee: it obliges reciprocal payment of accrued interest, but each party responds to its original creditors.
     • 3- They can be done directly, but the normal thing is that a bank or a broker intermediates
     • 4 -Standard term, 2 to 10 years
     • 5- Swaps represent almost 80% of the global derivatives market. As they are products that adapt to customer needs, they become one of the largest, most liquid and competitive markets in the world. This market is constantly in regulatory changes, seeking greater transparency, access to information and reduction of risk.
     • 6- The swap configuration is usually quite complex, since it must contain specifications on the exchange currencies, the interest rates, the dates of the exchanges and the formula to be used.
     • 7- There are different types of swaps that depend on the type of asset, whether they are for stock indices, interest rates, raw materials or for currencies. At present, the two types of swap operations that represent more than 90% of the operations carried out in the world are those related to the exchange of interest rates and currencies, which are the most used due to their level of profit and profit.