25 years: Derivatives trading & ETFs
The very first video on this series was a general introduction to derivatives – their history, their main categories, as well as the main benefits and drawdowns of using such instruments. In the second video on this series, Gontran takes us through the first ‘linear’ (non-optional) derivatives like "Futures" and "Forwards".
The very first video on this series was a general introduction to derivatives – their history, their main categories, as well as the main benefits and drawdowns of using such instruments. In the second video on this series, Gontran takes us through the first ‘linear’ (non-optional) derivatives like "Futures" and "Forwards".
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13 mins 23 secs
Derivatives are a large and complex topic. In this segment, we will look at the first ‘linear’ (non-optional) derivatives, like futures and forwards.
Key learning objectives:
Define Delta 1
Define Future payments
Define Exchanges
Define Forward payments
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Linear derivatives are also called ‘delta1’ because their Greek measure of market exposure ‘delta’ is worth 1. In other words, they are 100% correlated to their underlying, and they have no optionality.
Exchange-listed contracts related to the price of an asset or benchmark. It is an agreement to exchange cash for an asset at some point in the future.
Exchanges are private for-profit corporations which provide a trading venue to the public for the securities that they offer.
- For a commodity, what is the asset, what is its grade
- For an index: how it is calculated and by whom
- For an interest rate: how the rate is calculated and by whom
The exchanges also specifies the margining process
- What will the DSP be
- How and when payments have to happen
- Whether cross-margining is possible
- Margin requirements change from time to time
Futures and forwards give you virtually the same exposure. They essentially differ by their legal nature. The futures and the forward have the same price, but they do not have the same market exposure because the exposure of a futures contract is slightly bigger than the forward exposure because you collect interest that you collect from the margin calls.
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