DerivativesLecture 1

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Introduction

Derivatives are financial instruments whose price and value derive from the value of the underlying assets or other variables (ISDA)

Derivatives are a “zero sum game”

Derivatives Definition

1840s Midwest USA farmers 1848 Chicago Board of Trade (CBOT) for

grain 1874 Chicago Produce Exchange for

butter/eggs 1919 Chicago Mercantile Exchange (CME) Risk management Land options Risk management

History of Derivatives

OTC vs. Exchanges

Eurex (E-X) Chicago Board Options Exchange (CBOE) Chicago Mercantile Exchange (CME) Chicago Board of Trade (CBOT) New York Mercantile Exchange (NYMEX) Hong Kong Futures Exchange (HKFE)

Derivative Markets

Source: WFE/IOMA Derivatives Market Survey 2014

Source: Bank for International Settlements

Dec 200758,244

Source: WFE/IOMA Derivatives Market Survey 2014

Source: WFE/IOMA Derivatives Market Survey 2014

Futures Options / Warrant Future options Swaps Mortgage backed securities Forward Rate Agreement Convertible bonds Real options

Derivative Instruments

Stocks (example) Bonds Indices Commodities (examples for metal and ag.) Currencies Weather Carbon emissions Radio bandwidth

Underlying Assets

Arbitrage Speculation Hedging

Derivative Uses