2. Demystifying Derivatives Warren Edwardes we@dc3.co.uk 1 Demystifying Derivatives Warren Edwardes ceo, Delphi Risk Management Limited

3. Demystifying Derivatives Warren Edwardes we@dc3.co.uk 2 Author of Key financial instruments: –understanding and innovating in the world of derivatives

4. Demystifying Derivatives Warren Edwardes we@dc3.co.uk 3 Famous cases: Barings – founded in 1763 – crashed through lack of control of derivatives

5. Demystifying Derivatives Warren Edwardes we@dc3.co.uk 4 Famous cases: Equitable Life – founded in 1762 – crashed through not using derivatives to manage interest rate risk – boards have been successfully sued for not using derivatives to manage risk

6. Demystifying Derivatives Warren Edwardes we@dc3.co.uk 5 So what’s a derivative? a financial market derivative instrument is derived from other cash market instruments or other derivatives. the majority of financial instruments are not new instruments. They are merely combinations of derivatives and/or standard cash market instruments the building block approach

7. Demystifying Derivatives Warren Edwardes we@dc3.co.uk 6 Examples of derivatives - commodities orange juice futures

8. Demystifying Derivatives Warren Edwardes we@dc3.co.uk 7 Examples of derivatives - commodities Oil futures have liquid trading homogenous product

9. Demystifying Derivatives Warren Edwardes we@dc3.co.uk 8 Examples of derivatives - commodities Coffee a liquid market fairly standardised

10. Demystifying Derivatives Warren Edwardes we@dc3.co.uk 9 Examples of derivatives - commodities wine ?? Not homogeneous not customer needs driven Paris market unlikely to survive

11. Demystifying Derivatives Warren Edwardes we@dc3.co.uk 10 Examples of derivatives - commodities property / real estate ?? Not homogeneous FOX property market failed in 1991

12. Demystifying Derivatives Warren Edwardes we@dc3.co.uk 11 Examples of derivatives - shares? A share is an option on the assets of a firm

13. Demystifying Derivatives Warren Edwardes we@dc3.co.uk 12 Examples of derivatives - retail financial products foreign exchange notes

14. Demystifying Derivatives Warren Edwardes we@dc3.co.uk 13 Examples of derivatives - retail financial products fixed rate mortgages

15. Demystifying Derivatives Warren Edwardes we@dc3.co.uk 14 Examples of derivatives - retail financial products equity index linked savings

16. Demystifying Derivatives Warren Edwardes we@dc3.co.uk 15 Examples of derivatives - retail financial products Insurance?

17. Demystifying Derivatives Warren Edwardes we@dc3.co.uk 16 4 key financial building blocks spot –the now contract - like exchanging Pounds for Pesetas in the high street forward –you could buy your Euros in the forward market; payment and delivery next year. deposit –you could borrow money, buy the Euros now (spot) and deposit the Euros. option –Equitable Life gave interest rate guarantees - but didn’t manage the risk!

18. Demystifying Derivatives Warren Edwardes we@dc3.co.uk 17 Conclusion: what’s a derivative? a financial market derivative instrument is derived from other cash market instruments or other derivatives. the majority of financial instruments are not new instruments. They are merely combinations of derivatives and/or standard cash market instruments remember the building block approach

19. Demystifying Derivatives Warren Edwardes we@dc3.co.uk 18 And finally! Beware of insider trading underlying price manipulation –credit derivatives terrorists selling put options on American Airlines!

20. Demystifying Derivatives Warren Edwardes we@dc3.co.uk 19 Demystifying derivatives by Warren Edwardes