Revision on Financial Derivatives &
Properties of Options Prices
• What are financial derivatives? What are their roles in finance? • Give examples of derivatives and draw their profit diagrams. • Name some financial derivatives that are traded in Bursa Malaysia.
A financial instrument that has a value determined by the price of something else Risk management. Derivatives are tools for companies and other users to reduce risks Speculation. Derivatives can serve as investment vehicles Reduce transaction costs. Sometimes derivatives provide a lower cost way to undertake a particular financial transaction Regulatory arbitrage. It is sometimes possible to circumvent regulatory restrictions, taxes, and accounting rules by trading derivatives 3
Position Long forward
Maximum Loss – Forward price
Maximum Gain Unlimited
Short forward Long call Short call Long put Short put
Unlimited – FV(premium) Unlimited – FV(premium) FV(premium) – Strike price
Forward price Unlimited FV(premium) Strike price – FV(premium) FV(premium)
Derivatives Traded in Bursa Malaysia
Commodity Derivatives • Crude Palm Oil Futures (FCPO) • Crude Palm Kernel Oil Futures (FPKO) • USD Crude Palm Oil Futures (FUPO) • Options on Crude Palm Oil Futures (OCPO) Equity Derivatives • FTSE Bursa Malaysia KLCI Futures (FKLI) • FTSE Bursa Malaysia KLCI Options (OKLI) • Single Stock Futures (SSFs) Financial Derivatives • 3 Month Kuala Lumpur Interbank Offered Rate Futures (FKB3) • 3-Year Malaysian Government Securities Futures (FMG3) • 5-Year Malaysian Government Securities Futures (FMG5)
• What is short selling? • Name some of the common exercise styles of options? • Explain the ‘moneyness’ of an option.
• Exercise style:
European-style: can be exercised only at expiration date American-style: can be exercised at any time before expiration Bermudan-style: can