Chapter 8- Risk management, financial futures, options, swaps and other hedging tools- Distinguish between options/futures/swaps- Swaps: not far from a swapshop or flea market (done with currencies)- *Mark to market- *Daily settlement on losses- *interest rate futures - *forwards: o There is no mark to market you deal with buy and seller o No standard contractso - Exchanges undergoes CBOTo Under clearing houseso They’ll never know about each other- Shorting: if you short something it involves betting against the market o If you are trying to avoid higher borrowing costs or drop in asset prices o If price of something goes down higher borrowing costs- Long V. Shorto When you are long: you are betting for the market, you are a holder of the asset- Basis risko This risk moves and that’s why it’s very risky. o The basis changes, it’s a moving target- Current to futures – something = basis- Will not need to calculate numbers of contracts, ergo and contract ratio- Options: o You have an option (only one person has the option)o The one who writes the check is the owner of the option- An option when you are shot= PUT- An option when you are long= call- The buyer of the option if buying a put, wants it to go dwon- If you are the seller you want it to go long- If you are a call buyer:- The writer is the one who receives the fee, before receiving the fee you have to wait for your orders- If you are a naked writer- things could get bad (you don’t have the position)- *open interest: established but not yet off set or exercisedo Used to get a feel for the market o If open interest is swelling: its indicative of a lot of people placing bets - OCC: office of comptroller and currency- *Risk measures of strategic reputation, price and liquidity- *swaps: mostly interest rate related-
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