Financial English
Unit 17:
Financial
Derivatives
Unit 17:
•
Revision of Unit 16
•
Background information of Unit 17
•
Useful points of this unit
•
Text
•
Exercises
•
Assignment
Revision of Unit 16
Review of Unit 16
•
Dictation
•
Blanks filling
Dictation
Dictation!
You are going to hear 5 sentences. Each will
be read three times. Write down the sentences
according to what you hear.
1.
2.
3.
4.
Check-up
5.
Dictation
Key to Dictation:
1.
2.
3.
4.
5.
An insurance intermediary is an individual or firm that
provides advice on insurance and can arrange policies.
It is noticed that most of the contingent commissions are
passed on to policyholders in the premium.
In most insurance transactions, there is an intermediary,
usually an insurance agent or broker, between the buyer and
the insurer.
Insurance intermediaries will go through the competitive
market in search of the best placement for their client.
In recent years, lots of new operation modes emerged in
insurance intermediary market, and innovation becomes an
internal impetus.
Blanks filling
Fill in the blanks with proper words or phrases given below
question
compensation
claim
inspect
cause
difficult
settlement
notice
damage
invoice
Mr. Cooper (C) is asking Ms. Wen (W) about the claim for insurance
C: One more thing I would like to know is how you deal with
_________ for cargo insurance.
W: Most of the insurance companies have the policy that immediate
__________should be given to the nearest branch or agency in the event
of damage ___________ a claim under a policy on goods.
Blanks filling
C: Then who will be responsible for next step?
W: The insurance company will appoint a surveyor to
__________ goods and report the nature and extent of the
____________. Usually a kind of certificate of loss will be
issued to the consignee who is held responsible for the
expense.
C: Of course, the claims procedure will vary by
circumstances.
W: True. But undoubtedly a quicker ___________should be
secured in case of losses or damages.
C: Would you please tell me what documents are usually
required when making an insurance claim?
Blanks filling
W: Generally the commercial __________issued to the buyer, the original
bill of lading, the original policy or certificate of insurance, the survey
report evidencing the loss or damage, exchange of correspondence
regarding their liability for the loss and also landing situation of the goods
at final destination.
C: It’s too complicated, I think.
W: What we just mentioned is just a theoretical procedure of an insurance
claim, in fact when we deal with specific cases, things usually are much
more ____________ than you can imagine. Anyway, we aim at providing
_________________ for the loss suffered by the insured.
C: I get to understand the importance of taking out correct and adequate
types of insurance, otherwise our legal rights to the goods will face the
danger of suffering from losses or damages.
W: For our insurance company, three fundamental principles must be
abided by.
Blanks filling
C: What are they?
W: The insurable interest, good faith, and indemnity.
C: I’d like to ask you for more information concerning all
these aspects we’ve discussed today.
W: Okay, if you have any ____________ during your reading,
feel free to contact me.
C: Thank you again for your kindness.
W: May we have more chances to work together.
C: Bye!
W: Bye!
Check-up
Check-up
Mr. Cooper (C) is asking Ms. Wen (W) about the claim for insurance
C: One more thing I would like to know is how you deal with
claims for cargo insurance.
W: Most of the insurance companies have the policy that
immediate notice should be given to the nearest branch or
agency in the event of damage causing a claim under a policy
on goods.
C: Then who will be responsible for next step?
W: The insurance company will appoint a surveyor to inspect
goods and report the nature and extent of the damage.
Usually a kind of certificate of loss will be issued to the
consignee who is held responsible for the expense.
Check-up
C: Of course, the claims procedure will vary by
circumstances.
W: True. But undoubtedly a quicker settlement should be
secured in case of losses or damages.
C: Would you please tell me what documents are usually
required when making an insurance claim?
W: Generally the commercial invoice issued to the buyer, the
original bill of lading, the original policy or certificate of
insurance, the survey report evidencing the loss or damage,
exchange of correspondence regarding their liability for the
loss and also landing situation of the goods at final
destination.
C: It’s too complicated, I think.
Check-up
W: What we just mentioned is just a theoretical procedure of an
insurance claim, in fact when we deal with specific cases,
things usually are much more difficult than you can imagine.
Anyway, we aim at providing compensation for the loss
suffered by the insured.
C: I get to understand the importance of taking out correct and
adequate types of insurance, otherwise our legal rights to the
goods will face the danger of suffering from losses or damages.
W: For our insurance company, three fundamental principles
must be abided by.
C: What are they?
Check-up
W: The insurable interest, good faith, and indemnity.
C: I’d like to ask you for more information concerning all
these aspects we’ve discussed today.
W: Okay, if you have any question during your reading,
feel free to contact me.
C: Thank you again for your kindness.
W: May we have more chances to work together.
C: Bye!
W: Bye!
Text : Background Information
本章旨在介绍金融衍生品的定义，使学生明
确金融衍生品的概念，了解常见金融衍生品的
种类，知道金融衍生品的套期保值和投机功能，
了解金融衍生品交易的风险和收益。
Text : Useful points of this unit
本章重点:
通过本章学习，学生应该掌握
1、金融衍生品的种类
2、金融衍生品的功能
3、金融衍生品的风险和收益
Unit 17:
17.1 Introduction to Financial Derivatives
17.2 Types of Financial Derivatives
ETD
OTC
17.3 Functions of Financial Derivatives
HEDGING
SPECULATION
17.4 Risks and Benefits
Listening
Text
17.1 Introduction to Financial
Derivatives
Listen carefully to the first part of the text and then
try to understand it.
Text :
Financial derivatives are financial contracts, or
financial instruments, whose values are derived from the
value of something else (known as the underlying). The
underlying on which a derivative is based can be an asset
(e.g., commodities, equities (stocks), residential mortgages,
commercial real estate, loans, bonds), an index (e.g.,
interest rates, exchange rates, stock market indices,
consumer price index (CPI)), or other items (e.g., weather
conditions, or other derivatives). Credit derivatives are
based on loans, bonds or other forms of credit.
Text :
The main kinds of derivatives are: forwards
(which if traded on an exchange are known as futures);
options; and swaps.
Because the value of a derivative is contingent
on the value of the underlying, the notional value of
derivatives is recorded off the balance sheet of an
institution, although the market value of derivatives is
recorded on the balance sheet.
End of part 1
Text : Language Points
derivative n. a financial instrument whose value is
based on another security. 衍生品
derive from
从… 获得…, 来自…， 起源于…
underlying adj. fundamental, being or involving basic
facts or principles 基本的， 根本的
It's the essential nature or underlying reality.
这就是真实的重要本性。
The underlying principle behind Intranet theory is "information
democracy".
内部网理论背后的基本原理是“信息民主”。
equity n. the ownership interest of shareholders in a
corporation 股本， 股票
Text : Language Points
residential mortgage
住宅按揭， 住宅抵押
mortgage
n. / vt.抵押
repay one's mortgage in monthly instalment
每月分期付款偿还抵押借款
real estate
property in the form of land and
buildings, rather than personal possessions. 不动产
index n. a number or ratio (a value on a scale of
measurement) derived from a series of observed facts;
can reveal relative changes as a function of time 指数
(pl. indexes or indices)
Text : Language Points
be contingent on determined by conditions or
circumstances not yet established 视情况条件而定的
Our arrival time is contingent on the weather.
我们的抵达时间取决于天气情况。
notional value
the face value of the underlying
instruments on which derivatives are traded. 名义价值
， 名目金额
balance sheet
n. a record of the financial situation
of an institution on a particular date by listing its assets
and the claims against those assets 资产负债表， 决算
表， 平衡表
Listening
Text
17.2 Types of Financial
Derivatives
Listen carefully to the second part of the text and
then try to understand it.
Text :
Broadly speaking there are two distinct groups of
derivative contracts, which are distinguished by the
way they are traded in market.
Exchange-traded derivatives (ETD)
Over-the-counter (OTC)
Text :
Exchange-traded derivatives (ETD) are
those derivatives products that are traded via
specialized derivatives exchanges or other
exchanges. A derivatives exchange acts as an
intermediary to all related transactions, and
takes initial margin from both sides of the trade
to act as a guarantee. The world's largest
derivatives exchanges (by number of transactions)
are the Korea Exchange (which lists KOSPI
Index Futures & Options),
Text :
Eurex (which lists a wide range of European
products such as interest rate & index products),
and CME Group (made up of the 2007 merger of
the Chicago Mercantile Exchange and the
Chicago Board of Trade and the 2008 acquisition
of the New York Mercantile Exchange).
According to the Bank for International
Settlements, the combined turnover in the
world's derivatives exchanges totaled US$ 344
trillion during the fourth quarter of 2005.
Text :
Over-the-counter (OTC) derivatives are
contracts that are traded (and privately
negotiated) directly between two parties,
without going through an exchange or other
intermediary. Products such as swaps, forward
rate agreements, and exotic options are almost
always traded in this way. The OTC derivative
market is the largest market for derivatives,
and is unregulated. OTC derivatives are largely
subject to counterparty risk, as the validity of a
contract depends on the counterparty's
solvency and ability to honor its obligations.
End of part 2
Text : Language Points
via prep. by making use of that means or person or
through a place on the way to your destination经由，
经过，通过
to travel from Beijing to Shanghai via Tianjin
由北京经由天津去上海
I sent a message to Mary via her brother.
我托玛丽的兄弟把信带给她。
margin n. the amount of collateral a customer
deposits with a broker when borrowing from the
broker to buy securities 保证金
Korea Exchange
韩国证券交易所
Text : Language Points
Eurex
欧洲期权与期货交易所
CME Group
美国芝加哥交易所集团
the Bank for International Settlements 国际清算银行
turnover n. 销售量, 营业额
Our remuneration increase with the turnover.
我们的报酬随营业额的增加而增加。
Turnover tax = business tax
营业税
Text : Language Points
exotic option a type of option with a more
complicated pay-out structure than a plain vanilla
put or call option.第二代期权组合
exotic adj. 异国的
Their taste runs to exotic food.
他们喜欢吃外国风味的食品。
solvency n. the ability to meet maturing obligations
as they come due 偿付能力
We should be much obliged if you would give us your opinion of
their solvency and trustworthiness.
贵方对该公司的付款能力与信用状况持何看法，恳请告知，则
感厚谊。
Listening
Text
17.3 Functions of Financial
Derivatives
Listen carefully to the third part of the text and
then try to translate some sentences.
Text :
Derivatives can be used to mitigate the risk
of economic loss arising from changes in the value
of the underlying. This activity is known as hedging.
Alternatively, derivatives can be used by investors
to increase the profit arising if the value of the
underlying moves in the direction they expect. This
activity is known as speculation.
HEDGING
SPECULATION
Sentence Translation
Text :
HEDGING
Derivatives allow risk about the value of the underlying
asset to be transferred from one party to another. For example,
a wheat farmer and a miller could sign a futures contract to
exchange a specified amount of cash for a specified amount of
wheat in the future. Both parties have reduced a future risk:
for the wheat farmer, the uncertainty of the price, and for the
miller, the availability of wheat. However, there is still the risk
that no wheat will be available due to causes unspecified by
the contract, like the weather, or that one party will renege on
the contract. (Although a third party, called a clearing house,
insures a futures contract, not all derivatives are insured
against counterparty risk.)
Text :
From another perspective, the farmer and the miller both
reduce a risk and acquire a risk when they sign the futures
contract: The farmer reduces the risk that the price of wheat
will fall below the price specified in the contract and acquires
the risk that the price of wheat will rise above the price
specified in the contract (thereby losing additional income
that he could have earned). The miller, on the other hand,
acquires the risk that the price of wheat will fall below the
price specified in the contract (thereby paying more in the
future than he otherwise would) and reduces the risk that the
price of wheat will rise above the price specified in the
contract. In this sense, one party is the insurer (risk taker) for
one type of risk, and the counterparty is the insurer (risk
taker) for another type of risk.
Text :
Sentence Translation
Hedging also occurs when an individual or institution
buys an asset (like a commodity, a bond that has coupon
payments, a stock that pays dividends, and so on) and sells it
using a futures contract. The individual or institution has
access to the asset for a specified amount of time, and then
can sell it in the future at a specified price according to the
futures contract. Of course, this allows the individual or
institution the benefit of holding the asset while reducing the
risk that the future selling price will deviate unexpectedly
from the market's current assessment of the future value of
the asset.
Text :
SPECULATION
Derivatives can be used to acquire risk, rather than to
insure or hedge against risk. Thus, some individuals and
institutions will enter into a derivative contract to speculate on
the value of the underlying asset, betting that the party
seeking insurance will be wrong about the future value of the
underlying asset. Speculators will want to be able to buy an
asset in the future at a low price according to a derivative
contract when the future market price is high, or to sell an
asset in the future at a high price according to a derivative
contract when the future market price is low.
Text :
Individuals and institutions may also look for arbitrage
opportunities, as when the current buying price of an asset falls
below the price specified in a futures contract to sell the asset.
Speculative trading in derivatives gained a great deal of
notoriety in 1995 when Nick Leeson, a trader at Barings Bank,
made poor and unauthorized investments in futures contracts.
Through a combination of poor judgment, lack of oversight by
the bank's management and by regulators, and unfortunate
events like the Kobe earthquake, Leeson incurred a $1.3 billion
loss that bankrupted the centuries-old institution.
End of part 3
Text : Key to Translation
金融衍生品可以减少因待交易金融产品价格波动而造
成的经济损失，这就是所谓的保值。另外，如果价格
变动预期正确，金融衍生品也可以为投资者带来利益，
这就是所谓的投机。
Text : Key to Translation
不论是个人还是企业购买了资产（比如某种商品、债
券、股票等），并打算以期货形式卖出时，就会形成
所谓的套期保值。按照期货合约的规定，资产所有人
不论是个人还是企业都可以先获取资产然后在未来某
一确定的时间以商定的价格将该资产卖出。
Text : Language Points
mitigate vt. to make it less unpleasant, serious, or
painful. 使缓和， 减轻
Nothing could mitigate the cruelty with which she had treated him.
她对他太残暴了，实在是罪无可恕。
to mitigate the sufferings of the dying woman
尽可能减轻这垂死妇人的痛苦
hedging n. any technique designed to reduce or
eliminate financial risk; for example, taking two
positions that will offset each other if prices change
套期保值， 对冲交易
speculation
n. an investment that is very risky but
could yield great profits 投机
Text : Language Points
counter-party risk
the risk that the opposite party to a
contract defaults on its obligations 交易对手风险
counter
n.相反的事；反对物; 反方向地（的）；
counter-envelopment on double flanks
反合围
Inform against a counter-revolutionary
检举一个反革命分子
He acted counter to his promise.
他的行动与他的诺言相反。
Text : Language Points
deviate
vi. to differ or diverge or cause to differ or
diverge, as in belief or thought;to turn aside or cause to turn
aside;
越( 轨), 脱离( 常轨); 违背; 偏斜, 离题
His remarks usually deviate from truth.
他的话通常都与事实不符。
Don’t deviate from the principle.
不要违背原则。
I will never deviate from what I believe to be right.
我绝不背离我自信正确的道路。
Text : Language Points
speculate vi. to buy or sell securities, property, etc, in the
hope of deriving capital gains 投机( in/on); to conjecture
without knowing the complete facts 沉思, 思索, 揣想, 设
想, 推测( about, on, upon)
speculate about the origin of the universe 推测宇宙的起源
speculate in stocks
speculate on a rise [fall]
做股票投机
做多头[ 空头] 投机, 赌涨[ 跌]
I've been -ting on my future.
我一直在思索我的未来。
How to Speculate with Stock Index Futures
如何以股价指数期货投机
Text : Language Points
arbitrage n. a kind of hedged investment meant to
capture slight differences in price；the activity of buying
shares or currency in one financial market and selling it at
a profit in another. 套利
Barings Bank巴林银行是英国历史最悠久的银行之一，
于1995年2月26日倒闭，其原因是一位名为尼克•李森
（Nick Leeson）的交易员在衍生性金融商品的超额交
易，投机失败，导致损失14亿美元。
Listening
Text
17.4 Benefits and Risks
Listen carefully to the fourth part of the text and
then try to translate some sentences.
Text :
RISKS
Derivatives are often subject to the following criticisms:
Possible large losses
Derivatives (especially swaps) expose investors to
counter-party risk
Unsuitably high risk for small or inexperienced investors
Large notional value
Leverage of an economy's debt
BENEFITS
Text :
Sentence Translation
 Possible large losses
The use of derivatives can result in large losses due to the
use of leverage, or borrowing. Derivatives allow investors to
earn large returns from small movements in the underlying
asset's price. However, investors could lose large amounts if the
price of the underlying moves against them significantly. There
have been several instances of massive losses in derivative
markets, such as the need to recapitalize insurer American
International Group (AIG) with $85 billion of debt provided
by the US federal government. An AIG subsidiary had lost
more than $18 billion over the preceding three quarters on
Credit Default Swaps (CDS) it had written. It was reported
that the recapitalization was necessary because further losses
were foreseeable over the next few quarters.
Text :
Derivatives (especially swaps) expose investors to
counter-party risk
For example, suppose a person wanting a fixed
interest rate loan for his business, but finding that banks
only offer variable rates, swaps payments with another
business who wants a variable rate, synthetically creating a
fixed rate for the person. However if the second business
goes bankrupt, it can't pay its variable rate and so the first
business will lose its fixed rate and will be paying a variable
rate again. If interest rates have increased, it is possible that
the first business may be adversely affected, because it may
not be prepared to pay the higher variable rate.
Text :
Different types of derivatives have different levels of
risk for this effect. For example, standardized stock
options by law require the party at risk to have a
certain amount deposited with the exchange, showing
that they can pay for any losses; Banks who help
businesses swap variable for fixed rates on loans may do
credit checks on both parties. However in private
agreements between two companies, for example, there
may not be benchmarks for performing due diligence
and risk analysis.
Text :
 Unsuitably high risk for small or inexperienced
investors
Derivatives pose unsuitably high amounts of risk
for small or inexperienced investors. Because derivatives
offer the possibility of large rewards, they offer an
attraction even to individual investors. However,
speculation in derivatives often assumes a great deal of risk,
requiring commensurate experience and market
knowledge, especially for the small investor, a reason why
some financial planners advise against the use of these
instruments. Derivatives are complex instruments devised
as a form of insurance, to transfer risk among parties
based on their willingness to assume additional risk, or
hedge against it.
Text :
Large notional value
Derivatives typically have a large notional value. As
such, there is the danger that their use could result in
losses that the investor would be unable to compensate
for. The possibility that this could lead to a chain
reaction ensuing in an economic crisis, has been pointed
out by legendary investor Warren Buffett in Berkshire
Hathaway's annual report. Buffett called them
'financial weapons of mass destruction.' The problem
with derivatives is that they control an increasingly
larger notional amount of assets and this may lead to
distortions in the real capital and equities markets.
Investors begin to look at the derivatives markets to
make a decision to buy or sell securities and so what was
originally meant to be a market to transfer risk now
becomes a leading indicator.
Text :
Leverage of an economy's debt
Derivatives massively leverage the debt in an economy,
making it ever more difficult for the underlying real
economy to service its debt obligations and curtailing real
economic activity, which can cause a recession or even
depression. In the view of Marriner S. Eccles, U.S.
Federal Reserve Chairman from November, 1934 to
February, 1948, too high a level of debt was one of the
primary causes of the 1920s-30s Great Depression.
Text :
Sentence Translation
BENEFITS
Nevertheless, the use of derivatives also has its benefits:
Derivatives facilitate the buying and selling of risk, and
thus have a positive impact on the economic system.
Although someone loses money while someone else gains
money with a derivative, under normal circumstances,
trading in derivatives should not adversely affect the
economic system because it is not zero sum in utility.
Former Federal Reserve Board chairman Alan
Greenspan commented in 2003 that he believed that the
use of derivatives has softened the impact of the
economic downturn at the beginning of the 21st century.
End of part 4
Text : Key to Translation
由于杠杆作用，或者叫借钱交易，因为金融衍生品允许
投资者通过标的资产价格的细微变动获得丰厚回报，相
应的金融衍生品也就可能导致巨额损失。也就是说当标
的资产价格的变动方向与投资者预期反向变化时，投资
者会赔钱。
Text : Key to Translation
金融衍生品交易推动了风险买卖，促进了经济发展。尽
管有人赚钱有人赔钱，在正常情况下，由于并非零和效
益，金融衍生品的交易不会阻碍经济发展的步伐。
Text : Language Points
recapitalize vt. 再投资; 改变[ 调整]... 的资本结构
AIG 美国国际集团。美国国际集团是世界保险和金
融服务的领导者，也是全球首屈一指的国际性保险
服务机构，业务遍及全球一百三十多个国家及地区，
其成员公司通过世界保险业最为庞大的财产保险及
人寿保险服务网络，竭诚为各商业、机构和个人客
户提供服务。当2008年美国房地产市场日益变糟时，
AIG仍深信信用违约互换（CDS）资产组合将能挺
过风暴。此后，AIG遭到了来自监管机构的压力。
AIG的债券被调降。2008年９月16日联邦储备银行
向陷于破产边缘的美国国际集团ＡＩＧ提供850亿
美元紧急贷款，贷款将以ＡＩＧ的全部资产为抵押，
美国政府将持有该集团近80％股份。
Text : Language Points
subsidiary n. short for subsidiary company 子公司
母公司 parent company
Uh guano company will set up a sale subsidiary in
singapore.
华光公司将在新加坡建立一个子公司。
preceding adj.going or coming before; former 在前的,
前面的
Each generation surpasses the preceding one.
一代更比一代强。
CDS 信贷违约掉期: 一种转移交易方定息产品信贷风
险的掉期安排。 就是给金融衍生品的信用作担保
Text : Language Points
synthetically adv. by synthesis; in a synthetic manner 综
合地， 合成地
some of these drugs have been derived from opium and others
have been produced synthetically.
这些毒品有的是从鸦片中得来的， 而其他一些则是合成的。
adversely adv. in an adverse manner 逆地, 反对地
She was adversely affected by the new regulations.
新的规章制度给她带来了诸多不便。
Therefore, nations and states with high levels of pollution can
adversely affect those with the strictest pollution laws.
因此，那些污染较严重的国家和地区反过来影响有着严格的污染
法律规范的国家和地区。
Text : Language Points
benchmark
n. a standard by which something
can be measured or judged 基准
due
adj. requisite; fitting; proper;adequate or
sufficient; enough 适当的; 应做的; 应得的; 足够的
When is the train due at Shanghai?
火车该什么时候到上海?
Her illness was due to bad food.
她的病是坏了的食物造成的。
diligence
n.steady and careful application 勤奋， 勤勉
Care and diligence bring luck.
谨慎和勤奋才能抓住机遇。
Text : Language Points
assume
vt. take power or responsibility 承担
assume the reins of government
执政, 开始掌权
assume a leading position
担任领导职务
assume responsibility
负责, 承担责任
commensurate
adj. corresponding in size or
degree or extent 相应的,相称的
The pay should be commensurate with the work.
工资应与工作相称才是。
Text : Language Points
Warren Buffett 沃伦·巴菲特，世界上最伟大的投资
者,股神。
Berkshire Hathaway 伯克希尔-哈撒韦公司，1965年,35
岁的巴菲特收购的一家濒临破产纺织企业，1994年
底已发展成拥有230亿美元的伯克希尔工业王国，由
一家纺纱厂变成巴菲特庞大的投资金融集团。
distortion n. changing of something into something
that is not true or not acceptable 歪曲，失真
a hopeless distortion of the truth
肆意歪曲真理
Text : Language Points
curtail
vt. place restrictions on 限制
John's father curtail his allowance.
约翰的父亲减少了他的零用钱。
The minister had to curtail his visit.
部长不得不缩短访问日期。
U.S. Federal Reserve 美国联邦储备系统于1913年
国会立法通过后成立，是美国的中央银行。
Text : Language Points
facilitate
vt.to make easier; assist the progress of使容
易, 使 不费力,帮助, 促进
Modern devices facilitatedomestic work.
现代设备使家务活便利了。
It would facilitate matters if you were more co-operative.
要是你再合作些，事情就会变得更容易。
The new underground railway will facilitate the journey to all
parts of the city.
新的地下铁路将为去城市各处提供方便。
艾伦·格林斯潘（1926年3月6日－），美
国犹太人，美国第十三任联邦储备委员会主席。他被媒体
业界看做是“经济学家中的经济学家”和“大师”。
Alan Greenspan
Exercises of this Unit
Exercises of Unit 17
•
True or False
•
Case Analysis
•
Discussion
Text : Exercise
True or False
1. Forwards have the same meaning as futures. ( )
2. The value of a derivative is contingent on the value of the
underlying. The notional value of derivatives is recorded off
the balance sheet of an institution, while the market value of
derivatives is recorded on the balance sheet. ( )
3. Few types of derivative instruments may trade on
traditional exchanges. ( )
4. The ETD derivative market is the largest market for
derivatives, and is unregulated. ( )
5. Depending on the terms of the contract, the potential gain
or loss on a derivative can be much higher than if they had
traded the underlying security or commodity directly. ( )
Check-up
Text : Exercise
True or False
1. Forwards have the same meaning as futures. (F)
2. The value of a derivative is contingent on the value of the
underlying. The notional value of derivatives is recorded off
the balance sheet of an institution, while the market value of
derivatives is recorded on the balance sheet. (T)
3. Few types of derivative instruments may trade on
traditional exchanges. (F)
4. The ETD derivative market is the largest market for
derivatives, and is unregulated. (F)
5. Depending on the terms of the contract, the potential gain
or loss on a derivative can be much higher than if they had
traded the underlying security or commodity directly. (T)
Text : Exercise
Case Analysis
Read the materials below and try to analysis the two
sides of the sword of financial derivatives. Will the
benefit attract you? Or are you scared by the high risks?
Check-up
Text : Case Analysis
1. In recent years, derivatives have been associated with
a few truly notable events, including the collapses of
Barings by René M. STULZ, Third Quarter 2005 Bank
(the Queen of England’s primary bank) and Long-Term
Capital Management (a hedge fund whose partners
included an economist with a Nobel Prize awarded for
breakthrough research in pricing derivatives).
Derivatives even had a role in the fall of Enron. Indeed,
just two years ago, Warren Buffett concluded that
“derivatives are financial weapons of mass destruction,
carrying dangers that, while now latent, are potentially
lethal.” Michael Morgenstern, the Milken Institute
Review.
Text : Case Analysis
2. A U.S. exporter who expects to receive a €100
million payment for goods in six months. Suppose
that the price of the euro is $1.20 today. If the euro
were to fall by 10 percent over the next six months,
the exporter would lose $12 million. But by selling
Euros forward, the exporter locks in the current
forward exchange rate. If the forward rate is $1.18
(less than $1.20 because the market apparently
expects the euro to depreciate a bit), the exporter is
guaranteed to receive $118 million at maturity.
（END OF THE CASE）
Text : Key to Case Analysis
Will the benefit attract you? Or are you scared by the
high risks。
1. Although some serious dangers are associated with
derivatives, handled with care they have proved to be
immensely valuable to modern economies, and will
surely remain so.
2. In the second example, the financial position is a
forward contract, the risk is depreciation of the Euro,
and the exposure is €100 million in six months, which is
perfectly hedged with the forward contract. Since no
money changes hands when the exporter buys Euros
forward, the market value of the contract must be zero
when it is initiated, since otherwise the exporter would
get something for nothing.
Text : Discussion
Discussion
Hedge is often mentioned in financial derivatives.
Discuss with your partner about the function of
hedging.
Assignments
1. Review the Text .
2. Keep in mind
•
the functions of financial derivatives
•
Benefits and Risks of financial derivatives
3. Do exercises in the book.