Financial Derivatives
by Divik Maheshwari, Aman Chugh
Financial Derivatives : The Currency and Rates Factor
- Cover
- Title Page
- Foreword
- Preface
- Acknowledgements
- About the Authors
- Derivatives—Through the Window
- 1. Universe of Derivatives: Facts
- Learning Objectives
- Introduction
- Global Foreign Exchange Market Turnover
- Growth of Global Foreign Exchange Turnover
- Concentration in the Banking Industry
- Turnover by Instrument
- Turnover by Maturity
- Turnover by Currency
- Turnover by Currency Pair
- Turnover by Execution Method
- Geographical Distribution of Turnover
- Amount of Foreign Exchange Contracts Outstanding as on End-June 2010
- Growth of Global Foreign Exchange Positions
- Positions by Counterparty
- Positions Value by Instrument
- Positions by Maturity
- Positions by Currency
- Derivatives Outstanding
- Amount Outstanding of Over-the-Counter (OTC) Derivatives
- Amount Outstanding of Exchange Traded Derivatives
- Size of OTC Derivative Markets in India
- Outstanding Derivatives of Banks in India
- Test Your Understanding
- 2. Derivatives Introduced: Indian Perspective
- Learning Objectives
- Derivatives: Legal Definition
- Major Types of Derivatives
- Participants in the Derivatives Market
- History and Legalization of Derivatives in India
- Additions and Amendments to Securities Contract (Regulation) Act, 1956 to Legalize the Derivative as Exchange Traded Contract 18
- Amendments and Additions to Reserve Bank of India Act, 1934 to Legalize OTC Derivatives
- Introduction of Currency Futures and Options on Exchanges in India
- Test Your Understanding
- 3. OTC FX Concepts
- Learning Objectives
- Concept of Base Currency and Home Currency
- Direct and Indirect Quotes
- Currency Regimes
- Fully Convertible
- Partially Convertible
- Pegged
- Concept of Hedging in Over-the-Counter Markets
- Introduction to Forex Rates Determination
- Cash Rate
- Tom Rate
- Spot Rate
- Forward Rate
- Important Related Notes
- Interest Rate Parity Theory
- Calculation of Rates
- How Do Banks Calculate Value Cash/Value Today Foreign Exchange Rate?
- Miscellaneous Illustrations
- Important Concept: Cross Currency
- Test Your Understanding
- 4. ETC FX Concepts
- Learning Objectives
- Introduction
- Currency Futures: Introduction
- Market Participants in Currency Futures Segment
- Hedgers
- Investors
- Arbitrageurs
- Currency Futures: Technical Aspects
- Concept of Margin in ETC Markets
- Initial Margin
- Mark-to-Market Margin
- Maintenance Margin
- Advantages of Currency Futures Market
- Transparency
- Accessibility
- Cost
- Efficient Price Discovery
- Credit Risk
- Standardized Contracts
- NSE and Thomson Reuters Screenshots
- Summary Statement and Ledger Formats
- Difference Between ETC and OTC
- Stock Futures in Brief
- Miscellaneous Illustrations
- Test Your Understanding
- 5. FX Options: Concepts
- 6. FX Options: Valued
- Learning Objectives
- Introduction
- Currency Option Market Mechanics in Real World
- Market Participants
- Introduction to Black and Scholes
- Option Premium Components
- Option Pricing and Greeks
- Binomial Model
- Risk Neutralization Model
- Black–Scholes Pricing Formulas
- Black–Scholes Pricing: Currency Options
- Assumptions of the Black–Scholes Model
- Factors Affecting Option Prices
- Underlying Price and Strike Price
- Time to Expiration
- Volatility
- Risk-free Interest Rate
- Option Greeks: Measurement of Risk in Option Pricing for Vanilla Options
- Graph of the Black–Scholes Model
- Volatility
- Historical/Realized Volatility Calculation
- Estimating Volatility from Historical Data
- Implied Volatility
- Implied Volatility Exhibits
- Application of Option Greeks, Risk Reversal and Fly in Real Market Scenario
- Delta
- Gamma
- Theta
- Vega
- Rho
- Risk Reversal
- Fly
- Miscellaneous Illustrations
- Test Your Understanding
- 7. FX Options: Structured Solutions
- Learning Objectives
- Vanilla Option
- Vanilla Option (European)
- Vanilla Spread (European)
- Range Forward/Risk Reversal
- Seagull
- Participatory Forward
- Ratio Forward
- Fader
- Accumulator Ratio Forward
- Target Redemption Notes (TARN)
- Barrier Option
- Vanilla Option with Knock-In (KI) (American)
- Vanilla Option with Double Knock-In (DKI) (American)
- Vanilla Option with Knock-Out (KO) (American)
- Vanilla Option with Double Knock-Out (DKO) (American)
- Vanilla Option with Knock-In and Knock-Out (KIKO) (American)
- Digitals
- Vanilla Digital (European)
- One Touch (OT) (American)
- Double One Touch (DOT) (American)
- Double Must Touch (DMT) (American)
- No Touch (NT) (American)
- Double No Touch (DNT) (American)
- Daily Range Accrual (RAC)
- Miscellaneous Illustrations
- Range Forward Strategy
- Range Extra Strategy
- Straddle Strategy
- Strangle Strategy
- Butterfly Strategy
- Bull Spread/Call Spread Strategy
- Bear Spread/Put Spread Strategy
- Test Your Understanding
- 8. Interest Rate Products: Vanilla to Exotic
- Learning Objectives
- Interest Rate Swaps
- Forward Rate Agreement
- Arrear Swap
- Full Currency Swap
- Coupon Only Swap
- Interest Rate Options
- Interest Rate Cap
- Collar
- Seagull
- European Knock-Out Cap
- Knock-Ins and Knock-Outs
- Range Accruals
- Variations
- Floating to Fixed Range Accrual
- Fixed to Fixed Range Accrual
- Yield Curve Structures
- Constant Maturity Swap
- Curve Steepeners
- Curve Flatteners
- Key Concepts of Rates Market
- Miscellaneous Illustrations
- Test Your Understanding
- 9. Money Market: The FX Impact
- Learning Objectives
- Introduction
- Interlinkage Between Money Market and Currency Market
- Money Market Instruments
- Overnight Call Money
- Call Money Market
- Repo/Reverse Repo Rate
- Inter Corporate Deposits (ICD)
- Commercial Paper
- Certificate of Deposit
- T-bills
- Most Common Interest Rate Benchmarks and Curves (Indian and Global)
- MIBOR
- Indian Benchmark Rate
- Mumbai Interbank Forward Offered Rate
- Forward Rate Agreement
- Mumbai Interbank Bid Rate
- Overnight Indexed Swap
- London Interbank Offer Rate and Interest Rate Swap
- Global Money Market Risk Indicators and Their Impact on Exchange Rate
- TED Spread
- LIBOR-OIS Spread
- Basis Swap
- Test Your Understanding
- 10. Indianomics
- Learning Objectives
- Types of Policies
- Monetary Policy
- Fiscal Policy
- Indian Data Releases
- Industrial Production Growth Rate
- Consumer Price Index
- Wholesale Price Index
- Balance of Trade (BOT)
- Trade Surplus
- Trade Deficit
- Repo and Reverse Repo Rate
- Foreign Investments
- Kinds of Foreign Investments
- Foreign Institutional Investment
- Test Your Understanding
- 11. Fundamental Analysis and Data Releases
- Learning Objectives
- Employment Data
- Jobless Claims
- Unemployment Rate
- Non-farm Payroll
- Help Wanted Index
- Employee Cost Index (ECI)
- Inflation Data
- Consumer Price Index
- Producer Price Index (PPI)
- Personal Consumption Expenditure (PCE) Deflator
- Import and Export Prices
- Activity-related Variables
- Gross Domestic Product
- Industrial Production
- Institute of Supply Management Manufacturing Index
- Institute of Supply Management Non-manufacturing Index
- Philadelphia Fed Survey
- NAPM: Chicago Index (Chicago PMI)
- New York Empire State Index
- Personal Income and Expenditure Outlays
- Retail Sales
- ICSC—UBS Store Sales
- Leading Indicators
- Existing Home Sales Report
- Housing Starts
- New Home Sales
- Factory Orders
- Durable Goods Orders
- Construction Spending
- Wholesale Trade
- Business Inventories
- Consumer Sentiment: Michigan Survey
- Leading Indicators Composite Index
- Motor Vehicle Sales
- MBA Purchase Applications
- External Sector
- International Trade Balance
- Current Account Balance
- Treasury International Capital Data
- Other Data Releases
- US Treasury Budget
- Money Supply
- Beige Book
- Productivity and Costs
- Consumer Confidence Index
- Consumer Credit Report
- Mutual Fund Flows
- Some International Indicators
- Tankan Survey: Bank of Japan
- IFO Survey
- ZEW Survey
- Purchasing Managers Index
- Retail Price Index: UK
- Royal Institute of Chartered Surveyors Residential Housing Survey
- Test Your Understanding
- 12. Technical Analysis
- Learning Objectives
- Introduction and Importance of Technical Analysis
- Kinds of Charts
- Fundamental Analysis Versus Technical Analysis
- Technical Analysis Concepts
- Support and Resistance
- Trends
- Introduction to Candlestick
- Types of Candles
- Reading Chart Patterns
- Reversal Patterns
- Continuation Pattern
- Technical Indicator
- Leading Indicators
- Lagging Indicators
- Steps in Technical Analysis
- Test Your Understanding
- 13. ISDA Agreement: Documenting Derivatives
- Learning Objectives
- Introduction
- ISDA Master Agreement
- History
- Architecture of the Agreement
- Single Agreement
- Events of Default and Termination Events
- Close Out Netting
- Taxation
- Multi-branch Issues
- Related Documents
- Schedule
- Credit Support Annex
- Confirmations
- Definitions
- Legal Issues
- Netting
- Set-off
- Authority and Capacity
- Reliance and Suitability
- Termination
- Advantages of the Agreement
- Test Your Understanding
- Appendix 1: Case Studies
- Appendix 2: Term Sheets
- Appendix 3: Derivative Disclosures in Annual Reports
- Appendix 4: Master Circular on Risk Management and Inter-Bank Dealings (Issued on 02 July 2007)
- Appendix 5: Master Circular on Risk Management and Inter-Bank Dealings (Issued on 01 July 2011)
- Appendix 6: Circular Issued with Relation to Suitability and Appropriateness of Derivative Transactions
- Index
- Copyright
*Source: The contents are taken from Reserve Bank of India (www.rbi.org.in) from Comprehensive Guidelines on Derivatives.
† “…this circular” here implies the circular DBOD.No.BP.BC.86/21.04/157/2006-07 dated April 20, 2007.
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