Project: Financial Instruments
Summary of All Lectures
(10 Lectures)
Radboud University Nijmegen
Yoël Guijt
, Week 1
Lecture 1: Introduction
Financial Risks:
> Value of the rm in uenced by unexpected changes in nancial prices; almost every rm feels it
Exchange Rate Risk:
> Transaction exposure — A change in one of the nancial prices will change the amount of a
receipt or payment (risk created when imp/exp contract is signed)
> Translation exposure — A change in the value of the rm as foreign assets are converted to
the home currency (from US back to Euro)
> Economic exposure — A change in foreign exchange rates will change rms receipts for
expenditures not only by direct price changes but also the price
change will alter the amount a rm sells/buys
Volatility:
> Exchange rates are extremely volatile in uncertain times
> Volatility index — VIX — is rising during crises or whatever
Risk Management Process:
> Try to forecast future prices more accurately … were unsuccessful in doing so, volatility!
> Alternative = Risk Management
> Moving production abroad, borrow in competitor’s currency
> Derivatives — Forward/Future, Swaps, Options
Forward Contract:
> Obligates the owner to buy a given asset on a speci c date at a speci ed price
Option Contract:
> A right and not an obligation to buy or sell an asset for a strike price at a certain date
Call option: ST - X Put option: X - ST
Breakeven Call: ST - X - C = 0 Breakeven Put: X - ST - P
Types of traders:
> Hedgers — Hedge against unexpected price risks
> Arbitrageurs — Try to pro t from di erences in prices on the same moment on di erent
markets
> Speculators — Try to pro t from di erences in prices on di erent moments
EXTRA LECTURE 1: Chapter 1 — Nature of Derivatives
Nature of derivatives:
> Derivative is an instrument whose value depends on the values of other more basic underlyings
> Can be constructed on anything that has a price
> Futures, forwards, options, swaps
Derivatives:
> Are used to hedge risks, speculate, arbitrage, change a liability’s nature, etc.
Futures:
> Is an agreement to buy or sell an asset at a certain price at a certain date
> Contrast is a spot contract, to buy or sell immediately
Futures Price:
> Particular contract has a price for which you agree to buy or sell
> Determined by supply and demand in the same way as a spot price
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Summary of All Lectures
(10 Lectures)
Radboud University Nijmegen
Yoël Guijt
, Week 1
Lecture 1: Introduction
Financial Risks:
> Value of the rm in uenced by unexpected changes in nancial prices; almost every rm feels it
Exchange Rate Risk:
> Transaction exposure — A change in one of the nancial prices will change the amount of a
receipt or payment (risk created when imp/exp contract is signed)
> Translation exposure — A change in the value of the rm as foreign assets are converted to
the home currency (from US back to Euro)
> Economic exposure — A change in foreign exchange rates will change rms receipts for
expenditures not only by direct price changes but also the price
change will alter the amount a rm sells/buys
Volatility:
> Exchange rates are extremely volatile in uncertain times
> Volatility index — VIX — is rising during crises or whatever
Risk Management Process:
> Try to forecast future prices more accurately … were unsuccessful in doing so, volatility!
> Alternative = Risk Management
> Moving production abroad, borrow in competitor’s currency
> Derivatives — Forward/Future, Swaps, Options
Forward Contract:
> Obligates the owner to buy a given asset on a speci c date at a speci ed price
Option Contract:
> A right and not an obligation to buy or sell an asset for a strike price at a certain date
Call option: ST - X Put option: X - ST
Breakeven Call: ST - X - C = 0 Breakeven Put: X - ST - P
Types of traders:
> Hedgers — Hedge against unexpected price risks
> Arbitrageurs — Try to pro t from di erences in prices on the same moment on di erent
markets
> Speculators — Try to pro t from di erences in prices on di erent moments
EXTRA LECTURE 1: Chapter 1 — Nature of Derivatives
Nature of derivatives:
> Derivative is an instrument whose value depends on the values of other more basic underlyings
> Can be constructed on anything that has a price
> Futures, forwards, options, swaps
Derivatives:
> Are used to hedge risks, speculate, arbitrage, change a liability’s nature, etc.
Futures:
> Is an agreement to buy or sell an asset at a certain price at a certain date
> Contrast is a spot contract, to buy or sell immediately
Futures Price:
> Particular contract has a price for which you agree to buy or sell
> Determined by supply and demand in the same way as a spot price
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