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Derivatives

Derivatives
Many money managers use derivatives for a variety of purposes, such as hedging — by taking a position in a derivative, losses on portfolio holdings may be minimized or offset by profits on the derivative. Likewise, derivatives can be used to gain quicker and more efficient access to markets; for example, it may be easier and quicker to purchase an S & P 500 futures contract than to invest in the underlying securities.[3] Derivatives are a contract between two parties that specify conditions (especially the dates, resulting values and definitions of the underlying variables, the parties' contractual obligations, and the notional amount) under which payments are to be made between the parties.[4][5] The most common underlying assets include commodities, stocks, bonds, interest rates and currencies, but they can also be other derivatives, which adds another layer of complexity to proper valuation. Still, even these scaled down figures represent huge amounts of money. Related:  EconomyFinancial Markets

Shadow Banking System The shadow banking system is a term for the collection of non-bank financial intermediaries that provide services similar to traditional commercial banks. Former Federal Reserve Chair Ben Bernanke provided a definition in April 2012: "Shadow banking, as usually defined, comprises a diverse set of institutions and markets that, collectively, carry out traditional banking functions--but do so outside, or in ways only loosely linked to, the traditional system of regulated depository institutions. Examples of important components of the shadow banking system include securitization vehicles, asset-backed commercial paper (ABCP) conduits, money market mutual funds, markets for repurchase agreements (repos), investment banks, and mortgage companies." Shadow banking has grown in importance to rival traditional depository banking and was a primary factor in the subprime mortgage crisis of 2007-2008 and global recession that followed.[1] [2] Overview[edit] Entities that make up the system[edit]

Dodd–Frank Wall Street Reform and Consumer Protection Act The Dodd–Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111–203, H.R. 4173; commonly referred to as Dodd-Frank) was signed into federal law by President Barack Obama on July 21, 2010 at the Ronald Reagan Building in Washington, DC.[1] Passed as a response to the Great Recession, it brought the most significant changes to financial regulation in the United States since the regulatory reform that followed the Great Depression.[2][3][4] It made changes in the American financial regulatory environment that affect all federal financial regulatory agencies and almost every part of the nation's financial services industry.[5][6] As with other major financial reforms, a variety of critics have attacked the law, some arguing it was not enough to prevent another financial crisis or more "bail outs", and others arguing it went too far and unduly restricted financial institutions.[7] Origins and proposal[edit] Share in GDP of U.S. financial sector since 1860[9] Overview[edit] Duties[edit]

Black–Scholes Robert C. Merton was the first to publish a paper expanding the mathematical understanding of the options pricing model, and coined the term "Black–Scholes options pricing model". Merton and Scholes received the 1997 Nobel Prize in Economics (The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel) for their work. The model's assumptions have been relaxed and generalized in a variety of directions, leading to a plethora of models which are currently used in derivative pricing and risk management. The Black-Scholes world[edit] The Black–Scholes model assumes that the market consists of at least one risky asset, usually called the stock, and one riskless asset, usually called the money market, cash, or bond. Now we make assumptions on the assets (which explain their names): (riskless rate) The rate of return on the riskless asset is constant and thus called the risk-free interest rate. Assumptions on the market: Notation[edit] Let the price of a European call option and where

Weather derivative Overview of uses[edit] Heating degree days are one of the most common types of weather derivative. Typical terms for an HDD contract could be: for the November to March period, for each day where the temperature rises above 18 degrees Celsius keep a cumulative count of the difference between 18 degrees and the average daily temperature. Depending upon whether the option is a put option or a call option, pay out a set amount per heating degree day that the actual count differs from the strike. History[edit] The first weather derivative deal was in July 1996 when Aquila Energy structured a dual-commodity hedge for Consolidated Edison Co.[1] The transaction involved ConEd's purchase of electric power from Aquila for the month of August. After that humble beginning, weather derivatives slowly began trading over-the-counter in 1997. Valuation[edit] Business pricing[edit] Historical pricing (Burn analysis)[edit] The historical payout of the derivative is computed to find the expectation.

Stock For "capital stock" in the sense of the fixed input of a production function, see Physical capital. For the goods and materials that a business holds, see Inventory. Shares[edit] Shares represent a fraction of ownership in a business. Types of stock[edit] Preferred stock may be hybrid by having the qualities of bonds of fixed returns and common stock voting rights. Rule 144 stock[edit] "Rule 144 Stock" is a common name given to shares of stock subject SEC Rule 144: Selling Restricted and Control Securities.[5] Under Rule 144, restricted and controlled securities are acquired in unregistered form. Stock derivatives[edit] History[edit] One of the earliest stock by VOC During the Roman Republic, the state contracted (leased) out many of its services to private companies. The earliest recognized joint-stock company in modern times was the English (later British) East India Company, one of the most famous joint-stock companies. Shareholder[edit] Main article: Shareholder Application[edit]

Bush's Bubble As bad as Bush's economic record is, it would appear far worse if not for the housing bubble. The latest data on growth suggest that the economy may again be faltering, just when President Bush desperately needs good numbers to make the case for his re-election. As bad as the Bush economic record is, it would be far worse if not for the growth of an unsustainable housing bubble through the three and a half years of the Bush Administration. About the Author Dean Baker Dean Baker, co-director of the Center for Economic and Policy Research, is the author of False Prophets: Recovering... Also by the Author Dire warnings about the deficit don’t add up mathematically. The median income of people over age 65 is less than $20,000. The housing market has supported the economy both directly--through construction of new homes and purchases of existing homes--and indirectly, by allowing families to borrow against the increased value of their homes. The crash of the housing market will not be pretty.

Glass–Steagall Act The term Glass–Steagall Act usually refers to four provisions of the U.S. Banking Act of 1933 that limited commercial bank securities activities and affiliations within commercial banks and securities firms.[1] Congressional efforts to “repeal the Glass–Steagall Act” referred to those four provisions (and then usually to only the two provisions that restricted affiliations between commercial banks and securities firms).[2] Those efforts culminated in the 1999 Gramm–Leach–Bliley Act (GLBA), which repealed the two provisions restricting affiliations between banks and securities firms.[3] [edit] The sponsors of both the Banking Act of 1933 and the Glass-Steagall Act of 1932 were southern Democrats: Senator Carter Glass of Virginia (who in 1932 had been in the House, Secretary of the Treasury, or in the Senate, for the preceding 30 years), and Representative Henry B. Steagall of Alabama (who had been in the House for the preceding 17 years). Legislative history of the Glass–Steagall Act[edit]

Getting To Know The "Greeks" An option's price can be influenced by a number of factors. These factors can either help or hurt traders, depending on the type of options positions they have established. To become a successful option trader, it is essential to understand what factors influence the price of an option, which requires learning about the so-called "Greeks" - a set of risk measures that indicate how exposed an option is to time-value decay, implied volatility and changes in the underlying price of the commodity. SEE: Options Basics Tutorial Influences on an Option's Price Figure 1 lists the major influences on both a call and put option's price. Bear in mind that results will differ depending on whether you long or short an option. SEE: The Price-Volatility Relationship: Avoiding Negative Surprises Figures 2 and 3, below, present the same variables, but in terms of long and short call options (Figure 2) and long and short put options (Figure 3). SEE: Going Beyond Simple Delta: Understanding Position Delta

Nadex History[edit] "Hedgelets" come in two varieties: binary options and capped futures.[4] Binary options are bets on outcomes, "yes/no" contracts, that pay out a small dollar amount (e.g. $100) if final price of an instrument is above the strike price and nothing if below. For instance, HedgeStreet launched Germany 30 Binary Options in 2008. As of mid-2006, the company had two major investment partners.[2] The Chicago Board Options Exchange purchased a minority stake in HedgeStreet in February 2006 and assists in marketing the company's "hedgelets". In 2007, UK based IG Group announced intent to acquire HedgeStreet[5][6] and later in the year completed the purchase of the company. Soon after the acquisition, IG Group renamed HedgeStreet to the North American Derivatives Exchange (Nadex). See also[edit] References[edit]

Debt A debt is an obligation owed by one party (the debtor) to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.[citation needed] A debt is created when a creditor agrees to lend a sum of assets to a debtor. Debt is usually granted with expected repayment; in modern society, in most cases, this includes repayment of the original sum, plus interest.[1] In finance, debt is a means of using anticipated income and future purchasing power in the present before it has actually been earned. Terms[edit] Interest[edit] Interest is the fee charged by the creditor to the debtor. Interest rates may be fixed or floating. Repayment[edit] Collateral and recourse[edit] A debt obligation is considered secured if creditors have recourse to specific collateral. Issuers of debt[edit] Governments[edit] Businesses[edit] Consumers[edit]

Related:  Comprendre le système bancaire