Derivatives and Arbitage

[pop3corn]

Uls and monseratto, turuan nyo naman ako dito oh, 5 beses ko na binasa to eh di ko talaga maintindihan

Future contracts
Future options
Stock futures
Swaps
Short selling


And also di ko maintindihan pag ang interests rate up eh bagsak ang market value of bonds, and ano ba yields, yun yield to maturity

gulong - gulo ako sa inverse relationships ng raising Or lowering interest rAtes sa securities?

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[Mguy]

Future contracts - buy/sell a commodity in the future at a specified price and date. - example, buy oil at usd100 a barrel 5 months from now.

Future options - Option to purchase/sell currencies, bonds, commodities in the future but you have the right to exercise it or not. example buy USD1M * 42.50 one year from now. If by one year the exchange rate is just 40, you have the option not to exercise it. You just pay the premium of the option.

Stock futures - Just like futures contracts pero sa stock market.

Swaps - swapping the interest of 2 loans, one fixed rate (just like a car loan) versus one floating rate (pabago bago ang interest rate for a specific period).

Short selling - Selling something you don't have. example, you sold SMC stock * P100 even though you don't have it. You wait for the market to go down and buy the SMC stock at a lower price to cover the stocks you sold earlier at a higher price.

[uls]

Future contracts -- betting on what the price of something will be the future

Future options -- options -- you buy a call option when you're betting the price of something will go up. you buy a put option when you're betting the price of something will go down. you pay a premium to the option seller. the seller hopes the options expire worthless pocketing the premium

Stock futures -- betting on the future price of...

Swaps -- swapping income streams with a counterparty hoping you end up with the better deal (interest rates swaps, currency swaps, etc)

Short selling -- borrowing a stock, selling it, buying it back at a lower price, return to lender, pocket the difference. basically it's betting the price of a stock will go down. but if it goes in the opposite direction you panic and buy asap before the price goes even higher -- short squeeze

[uls]

And also di ko maintindihan pag ang interests rate up eh bagsak ang market value of bonds, and ano ba yields, yun yield to maturity

gulong - gulo ako sa inverse relationships ng raising Or lowering interest rAtes sa securities?

in the secondary market... bonds are bought and sold (you think all bond investors hold to maturity?)

yield = coupon amount/price

example a bond -- par value $1000, coupon $100

so yield is 10% (10% = $100/$1000)

what if in the secondary market the price falls to $900?

so the yield rises to 11.11% (11.11% = $100/$900)

basically that's it but it's really more complicated than that

[uls]

so if you're a bond issuer (like Spain) and you see your bond prices collapsing in the secondary market (yields rising)... be afraid... be very afraid

[Monseratto]

And then comes Credit Default Swaps...