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Chapter 42 Entering the Family of Derivative Financial Instruments (1)
Derivative Financial Instruments: Covering an Umbrella
The U.S. subprime mortgage crisis that broke out in the spring of 2006 has now turned into a global financial crisis.When issuing home loans, financial institutions in the United States have no fear of risk at all, because they believe that even if the borrower cannot pay the monthly payment, the increase in home prices will increase the value of the guarantee.In this process, because they have complex and diverse derivative financial instruments, they appear to be more confident.Wall Street uses extremely complex financial tools to divide these securities and sell them to investors around the world, which has become the engine for Wall Street to obtain huge profits.

Lehman Brothers also joined the lucrative mortgage market.In 2004, Lehman bought California-based BNC Mortgage, which had been making loans to people with dire credit histories.Not only that, Lehman also bought Aurora Loan Services LLC, a company that issues loans to people without complete documentation. In the first half of 2007, Aurora issued $30 billion in subprime loans every month.

This strategy has resulted in record profitability for Lehman's real estate business.Sales at Lehman's capital markets unit jumped 2004 percent from 2006 to 56, faster than its investment banking and asset management divisions.In 2007, Lehman achieved three consecutive years of record profits!
Economist Harris said, "When everyone thinks that housing prices will rise, everyone believes it because we are in an era of unprecedented economic development. Of course, it is more because we have complex derivatives. It is considered to be a risk-averse." But it turns out that once the bubble bursts, the complex financial derivatives built on top of it will make the financial system almost collapse.

In the course of the intensification of the subprime mortgage crisis in the United States, derivative financial instruments actually "helped".This is also the strange thing. The original intention of financial institutions is to divide loans with various derivative financial instruments in an attempt to diversify risks, but the result is frustrating.

In the 20s, under the background of rapid changes in the global economy, politics, and technology, credit risk was growing exponentially.From the perspective of individual residents, the development of consumer credit makes individual residents appear as an important credit provider.A MasterCard report reads: "In 90, the growth rate of MasterCard credit card issuance (in U.S. dollars) was 1995% in Europe, 25% in Asia, 22% in Latin America, and 36% in the Middle East and Africa." From the company From a corporate perspective, almost all corporate accounts have receivables and payables, and many companies issue a large amount of corporate bonds.From a national point of view, the debt of all countries is constantly rising.All this speaks to the tremendous development of credit.The modern economy is essentially a credit economy, and credit plays an increasingly important role in all aspects of life and production in modern society.With the increasing development of credit, credit risk has attracted more and more attention.Credit derivatives are produced under such circumstances.

Credit derivative products, later developed into derivative financial instruments, its main functions are: diversification of credit risk, confidentiality, and increase of return on capital.Generally, three basic construction methods are mainly used: forward contract, swap and option.It is an innovative financial instrument based on basic financial instruments such as currency, bonds, and stocks. It presupposes the existence of other financial instruments, and takes these financial instruments as trading objects, and the price is also determined by these financial instruments.After the development of credit derivatives, many new products were added. Stock futures contracts, stock index futures contracts, option contracts, and bond futures contracts are all derivative financial instruments.

Credit derivatives is an emerging market, but its participants are very extensive, including commercial banks, investment banks, fixed-income investors, insurance companies, high-yield market funds, emerging market funds and some non-financial companies.Since the credit derivatives market is an emerging market with a relatively short development time, there are no clear regulatory regulations for the time being. Generally, relevant regulatory rules are applied, or analogy is made with traditional products with a more mature regulatory framework.The development of the credit derivatives market has had a profound impact on financial institutions, especially banks.

Forward interest rate contracts: another "weapon" to avoid risks

In October 2007, the central bank announced the launch of a forward interest rate agreement, adding another "weapon" for avoiding interest rate risks in the inter-bank market.　
A forward interest rate agreement refers to a financial contract in which both parties to the transaction agree to exchange interest calculated at the contract interest rate and the reference interest rate on the basis of a certain nominal principal during the agreement period on a certain date in the future.

my country's financial derivatives market has not developed for a long time. Before the launch of this business product, there were only two types of bond forward and interest rate swap.According to the central bank, the launch of the forward rate agreement business will help enhance investors' ability to manage interest rate risks.With the gradual deepening of interest rate liberalization, investors began to face more risks of interest rate fluctuations.Forward interest rate agreements allow investors to lock in interest rate levels starting from a certain point in the future, thereby effectively managing short-term interest rate risks.　
Peng Xingyun, director of the Monetary Theory and Monetary Policy Research Office of the Institute of Finance and Economics of the Academy of Social Sciences, believes that after the launch of this business, commercial banks have added tools to lock in interest rate risks. The central bank may further promote the marketization of deposit and loan interest rates in the next step. Loan interest rates are expected to gradually advance.

A forward interest rate agreement is a forward contract. The buyer and the seller (between the customer and the bank or between two banks) agree on the agreed interest rate for a certain period of time starting at a certain time point in the future (referring to the interest starting date), and specify the rate at which for the reference rate.On the starting date of the future interest, according to the stipulated agreed interest rate, term and principal amount, one party shall pay the other party the discounted amount of the interest difference between the agreed interest rate and the reference interest rate.

Under this agreement, the two parties to the transaction agree to borrow a fixed interest rate, a fixed amount, and a nominal principal expressed in a specific currency within a certain period of time starting from a certain date in the future.The buyer of the forward interest rate agreement is the nominal borrower. If the market interest rate rises, he pays the interest according to the interest rate determined in the agreement, thus avoiding the interest rate risk; but if the market interest rate falls, he still has to pay the interest according to the agreed interest rate. will suffer losses.The seller of the forward rate agreement is the nominal lender, and he charges interest at the rate determined in the agreement. Obviously, if the market interest rate falls, he will benefit; if the market interest rate rises, he will suffer.Forward contracts have a longer trading cycle and a larger time span than near-term contracts, and they contain many uncertain factors. In addition, the trading volume and open interest of forward contracts are not as large as those of recent contracts, and their liquidity is relatively poor, so the price of forward contracts fluctuates. More recent contract price fluctuations are severe and frequent.

Futures – Trade Tomorrow Today

Xiaolin estimated that the price of wheat would fall when the price of wheat was 2000 yuan per ton, so he signed a contract with the buyer in the futures market, agreeing that within half a year, Xiaolin could sell 10 tons of standard wheat to the buyer at any time at a price of 2000 yuan per ton.Five months later, as expected by Xiaolin, the price of wheat fell to 1600 yuan per ton. Xiaolin thought that the drop was almost the same, so he immediately bought 1600 tons of wheat at the price of 10 yuan, and changed hands according to the contract at 2000 yuan. The price was sold to the buyer, and he made a profit of 4000 yuan in a blink of an eye. The original deposit was also returned, and Xiao Lin closed his position with a profit.

Xiaolin actually uses selling to open a position, which means that Xiaolin does not have wheat in his hand, but because the futures can implement a short-selling mechanism, Xiaolin can first sign a sales contract with the buyer.And why did the buyer sign a contract with Kobayashi?Because he is bullish on wheat.Facts have proved that Xiaolin’s judgment is accurate. Otherwise, if the wheat price does not fall within half a year, but instead rises to 2400 yuan, then before the contract expires, Xiaolin must be forced to buy 10 tons of wheat at a high price and sell it to the buyer at the contract price. , In this way, Xiaolin will lose money, and the buyer will earn 4000 yuan.

In the case, Kobayashi was doing futures business.It is not difficult to see from it that the way to make money in futures is simply to earn the difference between buying and selling.

The English name of futures is "Futures", which is derived from the word "future". goods, so the Chinese call it "futures".Why has to be this way?Because the seller judges that the price of the commodity in his hand will reach the highest at a certain time, so he chooses to sell at that time to obtain the maximum profit.

The initial futures trading was developed from spot forward trading. In the initial spot forward trading, the two parties verbally promised to deliver a certain amount of commodities at a certain time. Later, with the expansion of the trading scope, verbal commitments were gradually replaced by sales contracts. .A futures contract refers to a standardized contract formulated by a futures exchange that stipulates the delivery of a certain amount of underlying objects at a specific time and place in the future.This kind of contract behavior is becoming more and more complicated, and an intermediary guarantee is needed to supervise the timely delivery and payment of buyers and sellers, so the world's first commodity forward contract exchange, the Royal Exchange, opened in London in 1571.In order to adapt to the continuous development of the commodity economy, in 1865 the Chicago Grain Exchange introduced a standardized agreement called "futures contract" to replace the original forward contract.Using this kind of standardized contract allows the contract to be resold, and gradually establishes a margin payment system, so a futures market specializing in the sale and purchase of standardized contracts is formed, and futures become an investment and financial management tool for investors.

Futures are traded on a physical basis, but you're not really selling wheat or anything.According to China's current system, the futures purchased by individual investors cannot be delivered in kind, and can only be used for speculation, which is a means of financial management.But the price of futures commodities does fluctuate around the market price of the real thing.Therefore, from this perspective, futures can be said to be entities relative to stocks.But from Xiaolin's example, we can see that the trading method of futures is similar to that of stocks, and the futures market is the same as the stock market, and it will always be thrilling.Futures is a double-edged sword, which can make you rich overnight or bankrupt you instantly.In any case, high profits always come with high risks.If you want to do futures business, you must have a super strong heart!
Of course, the futures market is a place for futures trading, which is the sum of various futures trading relationships.It is a highly organized and standardized market form developed on the basis of the spot market in accordance with the principle of "openness, fairness and justice".It is not only an extension of the spot market, but also another advanced development stage of the market.From the perspective of organizational structure, the futures market in a broad sense includes futures exchanges, clearing houses or settlement companies, brokerage companies and futures traders; the futures market in a narrow sense only refers to futures exchanges.

The "Four-Step Quick Method" of the New "Qianmin"

The first step: choose a brokerage company

If you want to do futures, you first need to choose a place where you can trade.Since futures trading must be carried out in the exchange, only the members of the exchange can operate and trade on the exchange.Before entering the futures market, ordinary investors should first choose a member of a futures brokerage company with legal agency qualifications, good reputation, safe funds, standardized operations and reasonable charges.

Step [-]: Open an account

Once you have selected a suitable brokerage firm, the next step is to open a futures trading account.Opening an account is easy and the brokerage firm will be more than happy to help with it.

First of all, you will read a "futures risk disclosure statement" (the risk disclosure statement is standardized and unified across the country), and after fully understanding the contents of the disclosure statement, sign your name.

Second, sign an entrusted transaction agreement with the futures brokerage company, which clearly stipulates the rights and obligations between the futures brokerage company and the client.You should read the agreement in detail, and make some special agreements with the futures brokerage company according to your own situation.

Third, fill in the "Futures Trading Registration Form" and fill in some of your basic information on the form.This form will be submitted to the exchange by the brokerage firm to open a unique futures trading symbol for you.

After the above-mentioned procedures are completed, the futures brokerage company will prepare a futures trading account for you, fill in the "account card" and hand it to you.In this way, the account opening work is completed.What you need to remember is that the futures trading account number and futures trading code, you will use them in futures trading.

(End of this chapter)