Derivatives - Other Types of Derivatives

 

Eurodollar Futures
Eurodollar futures work the same as T-bill contracts except the rate is based on LIBOR.

  • Price quotes and actual price is determined the in the same way as for T-bills.
  • Settles in cash
  • One of most active contracts in the markets
  • Instead of add-on interest, (for example a 100 @ 10% for a year and the bank would owe $110 dollars), the rate is subtracted from 100, just as it is with T-bills
  • With T-bills the investor would receive $1 million per contract, while in the Eurodollar futures market the firm would pay 1 million euros

Treasury Bond Contracts
A contract based on the delivery of a U.S. Treasury bond with any coupon and at least 15 years to maturity.

  • There are many different bonds that fit the above description.
  • To give some type of standardization, the markets use a conversion factor to achieve a hypothetical bond with a 6% coupon.
  • Because bond prices do not move in a linear fashion, there is a chance to use arbitrage to capitalize on the deviance of a bond when compared to the 6% standardized bond. To do this, traders look for the cheapest to deliver bond (CTD). This is the least expensive underlying product that can be delivered upon expiry to satisfy the requirements of a derivative contract. This helps minimize the slippage between the conversation factor and the actual price.
  • The CTD bond is always changing because prices and yields are always changing.
  • A contract covers $100,000 par value of U.S. Treasuries.
  • Contract expires March, June, September and December

Stock Index Contracts
Investors trading index options are essentially betting on the overall movement of the stock market as represented by a basket of stocks. Options on the S&P 500 are some of the most actively traded options in the world.

  • Quoted in terms equal to the index itself. For example if the S&P 500 is trading at 1050 the one-month contract may be at 1060.
  • Each contract has a multiplier. For the S&P 500, it is 250. The actual price in the above point would equal 1060 x 250 = $265,000.
  • S&P 500 contracts expire in March, June, September and December and can have maturity dates as far away as two years.
  • Settlement is in cash.
  • The FTSE 100 and Japan's Nikkei 225 are other types of indexes upon which stock index contracts are based.

Currency Contracts
Currency contracts function in the same way as forward contracts for currency.

  • They are typically much smaller than forward contracts.
  • Each contract has a stated size and quotation unit.
  • Future price for euros = 0.92, which leads to a contract price of 125,000(this is the contract size)(.92) = 115,000
  • Calls for actual delivery through book entry of the underlying currency.
European vs. American Options and Moneyness
Related Articles
  1. Career Education & Resources

    How Hard are the CFA Exams?

    Learn about the difficulty of the CFA exams with a description of the tests, some statistics on pass rates and suggestions that can help you pass the exams.
  2. Professionals

    What it Takes to be a Financial Analyst

    A financial analyst researches companies and economic conditions to make business, sector and industry recommendations.
  3. Career Education & Resources

    Financial Analyst: Career Path & Qualifications

    Read about what it takes to become a financial analyst in a corporation or securities firm, and learn how far you can rise in the profession.
  4. Career Education & Resources

    Financial Planner: Career Path & Qualifications

    Learn what education and certifications you need to become a financial planner, as well as the future prospects and earnings potential for financial planners.
  5. Career Education & Resources

    Where to Find Non-Profit Finance Jobs

    The non-profit sector offers a stable selection of jobs for those who seek other types of fulfillment from their jobs than just purely financial.
  6. Career Education & Resources

    Portfolio Manager: Career Path & Qualifications

    Learn about the basic requirements for getting hired as a portfolio manager, and discover how most professionals in the field rise into the position.
  7. Your Practice

    4 Professional Associations Advisors Should Join

    These four professional organizations are among the most respected and well known in the industry.
  8. Professionals

    Equity Research: Career Path and Qualifications

    Find out what equity research analysts do on a day-to-day basis, and learn more about the typical career progression for these securities professionals.
  9. Professionals

    What's on the CFA Level II Exam?

    The Chartered Financial Analyst Level II exam is the second of three tests that CFA candidates must pass.
  10. Professionals

    Financial Data Analyst: Career Path & Qualifications

    Learn more about the career options available to financial data analysts, and determine whether the profession is a good match for you.
RELATED TERMS
  1. Personal Financial Advisor

    Professionals who help individuals manage their finances by providing ...
  2. CFA Institute

    Formerly known as the Association for Investment Management and ...
  3. Security Analyst

    A financial professional who studies various industries and companies, ...
  4. Chartered Financial Analyst - CFA

    A professional designation given by the CFA Institute (formerly ...
RELATED FAQS
  1. What are the differences between a Chartered Financial Analyst (CFA) and a Certified ...

    The differences between a Chartered Financial Analyst (CFA) and a Certified Financial Planner (CFP) are many, but comes down ... Read Full Answer >>
  2. How do I become a Chartered Financial Analyst (CFA)?

    According to the CFA Institute, a person who holds a CFA charter is not a chartered financial analyst. The CFA Institute ... Read Full Answer >>
  3. What types of positions might a Chartered Financial Analyst (CFA) hold?

    The types of positions that a Chartered Financial Analyst (CFA) is likely to hold include any position that deals with large ... Read Full Answer >>
  4. Who benefits the most from prepaid expenses?

    Prepaid expenses benefit both businesses and individuals. Prepaid expenses are the types of expenses that are bought or paid ... Read Full Answer >>
  5. If I am looking to get an Investment Banking job. What education do employers prefer? ...

    If you are looking specifically for an investment banking position, an MBA may be marginally preferable over the CFA. The ... Read Full Answer >>
  6. Can I still pass the CFA Level I if I do poorly in the ethics section?

    You may still pass the Chartered Financial Analysis (CFA) Level I even if you fare poorly in the ethics section, but don't ... Read Full Answer >>
Hot Definitions
  1. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  2. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  3. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  4. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  5. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
Trading Center