Table of Derivatives and Credit Swaps Essay

Table of Derivatives and Credit Swaps Essay

Length: 1201 words (3.4 double-spaced pages)

Rating: Strong Essays

Open Document

Essay Preview

An agreement to trade an asset for cash in the future at a predetermined fixed price (Saunders & Cornett, 2011). Unlike options, futures contracts must be fulfilled regardless of a change in price in the future (Saunders & Cornett, 2011). Forward contracts are negotiated individually and the terms and conditions of the contract can differ from one contract to another (Saunders & Cornett, 2011). Forward contracts are not traded on an exchange increasing the risk associated with this type of derivative (Saunders & Cornett, 2011). A global survey by Servaes, Tamayo, and Tufano (2009) suggested forward contracts are the preferred method used by corporations in handling foreign exchange risk. Saunders and Cornett (2011) noted trading (includes trading on the spot market and forward market for foreign exchange) in foreign currency "dominates direct portfolio investments" (p. 430). A 6-month forward contract to deliver a 10-year $85 face value bond for $80 is negotiated between a buyer and seller today. In 6 months, the buyer of the contract must pay the seller $80 in return for a 10-year $85 face value bond. This contract must be fulfilled regardless if the cost of a 10-year $85 face value bond has increased or decreased in price over the 6-month period.
Similar to forward contracts, futures contracts are agreements to trade an asset for cash at a predetermined date in the future (Saunders & Cornett, 2011). However, unlike forward contracts, the value of the contract at the future date is determined through a daily marking to market (Saunders & Cornett, 2011). Additionally, the marking to market requires daily cash settlements on the value of the contract (Saunders & Cornett, 2011). Futures contracts are also traded on an excha...

... middle of paper ...

...(2011). Financial institutions management: A risk management approach (7th ed.). New York, NY: McGraw-Hill/Irwin.
Şontea, O., & Stancu, I. (2011). An Optimization of the Risk Management using Derivatives. Theoretical & Applied Economics, 18(7), 73-84. Retrieved from
Servaes, H., Tamayo, A., & Tufano, P. (2009). The theory and practice of corporate risk management. Journal of Applied Corporate Finance, 21(4), 60-78.
Sudacevschi, M. (2010). The innovations on the financial markets. Using derivatives for banking market risk coverage. Internal Auditing & Risk Management, 20(4), 49-60. Retrieved from

Yung-Ming, S., & Moles, P. (2010). What motivates banks to use derivatives: Evidence from Taiwan. Journal of Derivatives, 17(4), 67-78. Retrieved from

Need Writing Help?

Get feedback on grammar, clarity, concision and logic instantly.

Check your paper »

A Risk Neutral Framework For The Pricing Of Credit Derivatives Essay

- A Risk Neutral Framework For The Pricing Of Credit Derivatives 1. INTRODUCTION Considerable research effort has gone into Credit Derivatives since the early 1990’s. The roots of credit derivatives can be traced back to the notion that the credit risk of a firm can be captured by the credit rating ascribed to it. This premise is also the cornerstone of loan pricing and credit risk management models the world over, including J.P. Morgan’s CreditMetricsTM. Empirical research enables the predictability of the event of default as well as the Loss in the Event of Default (LIED)....   [tags: Business Finance Essays]

Free Essays
3426 words (9.8 pages)

History and Classfication of Derivatives Essay

- ... In 1865: forward contracts become Standardize. In 1874: Chicago Produce Exchange was created. In 1919: CPE becomes the Chicago Mercantile Exchange. In 1925: First futures clearinghouse was created. In 1922: Futures Act for Grains. In 1936: Options on futures are banned. In 1955: Corn Products Refining Company decision made by the Supreme Court. Modern brief history of derivatives in the US: In 1972: International Monetary Market (IMM) for trading currency futures was created. In 1975: first interest rate futures contract create by CBOT....   [tags: international monetary market, credit]

Strong Essays
824 words (2.4 pages)

Essay on Financial Instruments: Classification of Derivatives

- ... Derivatives Designed by Greek Philosophers: In history trace of derivatives can be found in Aristotle’s Politics. Aristotle tells the story of Thales (mathematician and philosopher) lived from 625 to 550 BC in Miletus (city of Ancient Greece). Thales predicted in wintertime an unusually massive olive crop. He seized the opportunity to negotiate with the owners the right but not the obligation to hire the entire crop in that region for the next autumn....   [tags: linear, non linear derivatives]

Strong Essays
1987 words (5.7 pages)

Financial Institutions: The Use of Derivative Securities to Hedge Asset-Liability

- Using derivatives to hedge risk or to engage in speculation can be an effective tool for financial institutions. Financial institutions of all types and sizes can utilize derivative securities “to hedge their asset-liability exposures and thus reduce the value of their net worth at risk due to adverse events” (Saunders & Cornett, 2011, p. 696). In general, derivatives involve an arrangement that sets forth an exchange of an asset or cash flow at a set time and price in the future (Saunders & Cornett, 2011)....   [tags: swaps, risks, banks]

Strong Essays
1460 words (4.2 pages)

Is it Hedging with Currency Derivatives Optimal for a Company Essay

- Gaining a better understanding of derivative securities with regard to hedging opportunities is essential in today’s financially-driven market. Financial derivative securities are used by many businesses to protect against risks or to profit from them. A company interested in protecting against the risk of some event would be engaging in hedging activities while one seeking to profit from a future event would be speculating (Eiteman, Stonehill, & Moffett, 2010). Hedging and speculation activities can be used against various types of risks faced by companies including those associated with interest rates, costs of commodities, and currency exchanges....   [tags: financial derivatives,foreign currency,total risk]

Strong Essays
1802 words (5.1 pages)

Essay about Derivatives Futures And Financial Engineering

- Derivative Futures and Financial Engineering Throughout financial markets worldwide the use of derivatives as a risk management methods have increased substantially over the last few decades. Derivatives are considered a financial instrument that derive their value from another financial asset or variable and as such they contrast from more commonly known financial instruments such as stocks and bonds. The main goal of derivatives is to protect investors against risk by allowing them to hedge their risk in the future value of an underlying asset (Derivative, 2016)....   [tags: Futures contract, Derivative, Forward contract]

Strong Essays
1083 words (3.1 pages)

Impact of Future Derivatives on Stock Market Volatility Essay

- Impact of Future Derivatives on Stock Market Volatility Derivatives has been the talk of the financial world after it was accussed as the primary reason for such a deep financial crisis that affecetd the global economy in 2007. Thus, the modelling of asset returns and judging the volatility of stock market and whether the derivatives have a substantial effect on stock market volatility, is still the key task for every finance professional as it provides much needed on risk patterns involved in investment process....   [tags: Stocks, Economy, Finance, Derivatives]

Strong Essays
1577 words (4.5 pages)

A Credit Score Impacts The Credit Essay

- A credit score impacts the credit that is accessible to you and the terms investment rate, and so forth, that moneylenders offer customers. It 's an essential piece of the clients credit wellbeing. When one seeks credit whether for a credit card, an auto loan, or a home loan banks need to realize what hazard they would take by crediting cash to a person. At the point when bank lenders request a client 's credit report, they can also request a FICO rating that is focused around the data in the report....   [tags: Credit score, Credit, Credit rating]

Strong Essays
1147 words (3.3 pages)

Credit Card And Credit Cards Essay

- Today credit cards have become increasingly popular and more frequently used than cash when it comes to making purchases. In 2012 it was found that 27% of all point of sale purchases were paid with cash and by 2017 that percentage was expected to drop to 23%. While credit cards are clearly being used more many people are paying the consequences. But where and when did the credit card even come about. John Biggins is the man given credit for creating the idea of credit cards in 1946. He started off with the “Charge-it” program where people could deposit sales slips in the bank and then the bank would then bill the customer who would use the card....   [tags: Credit card, Credit, Credit score, Credit history]

Strong Essays
1437 words (4.1 pages)

Notion of Derivatives Essay examples

- In the 2002 Berkshire Hathaway annual report, Warren Buffett details how it is that both the discrete and macroeconomic risks of derivative instruments pose a serious threat to the greater financial stakeholder. However, Buffet admits that his firm does use large derivative transactions to facilitate the management of its equity transactions, citing the micro-transactional benefit that can be realized by a party that is able to shift its risks to the financial market. With such a distinction in mind, this paper intends on developing how it is that the risks of derivatives are used in the global financial system to offset discrete financial risks, while replacing them with compounding counter...   [tags: market, risks, firm, transaction]

Strong Essays
934 words (2.7 pages)