1. Capital Markets Courses 11&12

2. XI. Forward and futures Forward contract No standardized Binding contract The forward contract buyer: buy the support asset The forward contract seller: sell the support asset Purpose: to eliminate the uncertainty related to the price evolution Result: Long = Spot price at maturity – Contract price Short = Contract price - Spot price at maturity

3. XI. Forward and futures Futures contract Standardized Characteristics: - Contract size and support asset - Delivery date - Price - Daily settling up (marked to market) - Price fluctuation - Liquidation

5. XI. Forward and futures ForwardFutures Non standardized: direct negotiationStandardized: traded on the exchange Result determined at the maturityResult determined daily Liquidation: at the maturityLiquidation: at the maturity or until the maturity Margin: onceMargin: must be maintaned daily

6. XI. Basis Difference between the future price and the spot price = basis At the maturity: basis = 0 If the contract is liquidated before the maturity: basis risk A futures contract is sold today at 296; support asset price: 291  basis: 5 tomorrow: futures price: 298,5, support asset price: 294  basis: 4,5 Profit from asset holding: 3 Loss from futures contract: 2,5 Total result = 0,5 = basis difference

7. XI. Term price (spot – futures parity) 2 possibilities for holding an asset in the future: A) Present buying and holding it B) Term buying and making a deposit in order to obtain the amount needed at the contract maturity Result A = Result B = =  An asset price is 291 today, interest rate is 10%/year, and 6M futures price is 305,2

8. XII. Options Contract which gives to its holder the right to purchase or to sell an asset for a specified price (strike or exercise price) and for a price paid (premium) Depending on the contract buyer interest regarding the support asset: - Call - Put Depending on the exercising moment: - European - American Depending on the trading market: - Standardized - No standardized

9. XII. Call Options Long callShort call Break even=X+premiumBreak even=X+premium S T <XS T <X Result=-premiumResult=+premium Payoff=0Payoff= 0 S T >XS T >X Result=-X+ S T - premium Result =X- S T +premium Payoff=-X+ S T Payoff =X- S T Result=Payoff-premiumResult=Payoff+premium X BE X STST STST

10. XII. Put Options Long putShort put Break Even=X-premiumBreak Even=X-premium S T <XS T <X Result=X-S T -premium Result =-X+ S T +premium Payoff=X- S T Payoff =-X+ S T S T >XS T >X Result=-premiumResult=+premium Payoff=0Payoff =0 Result=Payoff-premiumResult=Payoff+premium X BE X STST STST

11. XII. Options characteristics !Options elements: - Support asset type and quantity - Expiration date - Strike price (Exercise price) - Premium Depending the expectation regarding the market price evolution: option strategies

12. XII. Option Strategies. Straddle  Trading of 2 options (one put and one call) with the same support asset, same strike price and expiration date.  Strategy result = sum of results of the 2 options  Long straddle: BEput = break even PUT = X – premiums sum BEcall = break even CALL = X + premiums sum If X > S T : PUT is exercised: the support asset is sold at the strike price, is bought at the market price and the sum of premiums is paid If X = S T : strategy is abandoned; the loss is maximum = sum of the paid premiums If X < S T : CALL is exercised: the support asset is bought at the strike price, is sold at the market price and the sum of premiums is paid X BE call BE put

13. XII. Option Strategies. Straddle Short straddle: BEput = break even PUT = X – premiums sum BEcall = break even CALL = X + premiums sum If X > S T : PUT is exercised: the support asset is bought at the strike price, is sold at the market price, the premiums sum is cashed If X = S T : strategy is abandoned: maximum profit = premiums sum If X < S T : CALL is exercised: the support asset is sold at the strike price, is bought at the market price, the premiums sum is cashed X BE call BE put

14. XII. Option Strategies. Strangle  Trading of 2 options (one put and one call) with the same support asset and expiration date. Put exercise price < Call exercise price  Long strangle BEput = break even PUT = X put – premiums sum BEcall = break even CALL = X call + premiums sum If X put > S T : PUT is exercised: the support asset is sold at the put strike price, is bought at the market price and the sum of premiums is paid If X put < S T < X call : strategy is abandoned; the loss is maximum = sum of the paid premiums If Xcall < S T : CALL is exercised: the support asset is bought at the call strike price, is sold at the market price and the sum of premiums is paid BE put BE call X call X put

15. XII. Option Strategies. Strangle Short strangle BEput = break even PUT = Xput – premiums sum BEcall = break even CALL = Xcall + premiums sum If X put > S T : PUT is exercised: the support asset is bought at the put strike price, is sold at the market price, the premiums sum is cashed If X put < S T < X call : strategy is abandoned; the profit is maximum = sum of the paid premiums If Xcall < S T : CALL is exercised: the support asset is sold at the call strike price, is bought at the market price and the sum of premiums is cashed X put BE pu t X call BE call

16. XII. Exotic Options Asian Barrier - Knock out: - down and out - up and out - Knock in - down and in - up and in Lookback Currency-Translated Binary

17. XII. Option valuation Option premium depends on: - Intrinsic value (payoff) - Time value Sursa: Bodie, Z., A. Kane, and A. J. Marcus (2007), Essentials of Investments, 6th edition, McGraw Hill International Edition

18. XII. Option valuation Factors that should affect the value of an option: - Exercise price - Support asset price  Delta - Change in delta  Gamma - Time until the maturity  Theta - Change in volatility  Vega - Interest rate  Rho - Dividends

19. XII. Option valuation Increase in variableCall pricePut price Support asset price (Delta)  Exercise price  Volatility (Vega)  Time (Theta)  Interest rate (Rho)  Dividends 

20. Bibliografie Anghelache G. (2004), Piaţa de capital. Caracteristici. Evoluţii. Tranzacţii, Editura Economică, Bucureşti Bodie, Z., A. Kane, and A. J. Marcus (2007), Essentials of Investments, 6th edition, McGraw Hill International Edition www.sibex.ro