The Son of Finance of the Great Age

  Chapter 78 Exotic Options (1)

After experiencing the decline in January, the bullish side in the Singapore futures market calmed down one after another. Some reversed short positions, some stopped losses and left the market, and some were observing the situation. The scale of the offer has been reduced, but most of them still hold the same view on the trend after the RB stock market crash as before.

  The real good show has not yet been staged!

During this period, the Nikkei index once rushed close to 38,000 points, allowing market bulls to see the hope of rising again. The crazy period cannot be compared, only 70% to 80% of the total capital at the beginning.

The futures market is like this, a complete zero sum game, either you win or someone else wins, money is always going in two different directions, the market has winners and losers every day, and there are many more Many people are ready to enter the market under the temptation of getting rich.

   This is especially true for index futures markets. Different from general commodity futures, the things it targets are intangible and cannot be delivered, and can only be forcibly liquidated in the end.

  On February 21, 1990, the RB stock market opened, and the reported index was the same as the closing number of the previous trading day. It seemed that everything was fine, but soon the situation took a sharp turn for the worse.

  A large number of constituent stocks suddenly appeared on the market, and the sheer number made people dumbfounded and at a loss. Affected by this, the stock market went all the way down, falling from 36865 points at the opening to 35704 points, a day of 1161 points, or 3.15%, just because of the news that an American exchange would launch Nikkei futures. Confirmed news.

The market was obviously a bit slow in reacting to the news. On the second trading day, the index rose slightly, but in the next two trading days, the market continued to sell constituent stocks, which naturally caused the index to fluctuate again. On the third trading day, the index fell by 935 points. By the opening of trading on Monday, February 26, the index had fallen by 1,569 points, or as much as 4.5%. It once fell to 32,443 points, and finally closed at 33,321 points.

  On the day when the news about the launch of Nikkei futures in the United States came to this day, only four trading days have passed, and the RB index has fallen by 3544 points, a drop of nearly 10%.

   In other words, 10% of RB's total market value evaporated out of thin air, and hundreds of billions of dollars disappeared.

  Where did the money go?

  First of all, it must be explained that the money is not all real money, but the numbers on the books. Second, part of this money is indeed real money, which was earned by those who sold stocks at high prices.

For example, if a stock with a total of 100 million tradable shares (full circulation) is bought at 10 yuan, then its total market value is one billion yuan. When it rises to 12 yuan per share, the total market value That's 1.2 billion yuan. (Assuming that the shareholder structure does not change during this process) When a shareholder who holds 10% of the tradable shares feels that the price has reached the peak, and starts to sell the stock in his hand successfully at the position of 12 yuan or 11 yuan, then the price of this stock It fell from 12 yuan to 11 yuan, (assuming other shareholders are optimistic about the future and do not want to sell) the profit of this reduced shareholder will not exceed 20 million yuan, (because the price changes, it is impossible to be at 12 yuan price) and the market value of this stock has decreased by 100 million.

In fact, the index of the stock market is formed by thousands of investors in countless decisions. Just like the above example, if someone buys at a price of 12 or 13, then the price of this stock may increase. As a result, the entire market value will also expand accordingly.

  How can it affect the stock index? The first is that there is a very large amount of funds, and the second is that it can affect the fluctuations of constituent stocks.

   As we all know, the stock index is weighted by the prices of certain companies in the market in a specific period, not the prices of all stocks. These selected company stocks are called constituent stocks.

  The selected companies cover all aspects of economic life, including real estate, steel, aviation, shipping, electronics, machinery, finance, high-tech, etc., and all of them are leaders in the industry. It is precisely because of this that the combined index can truly reflect the economic situation of a country.

   Now, the stocks of these companies have been sold out in large numbers, which reflects some investors' views on the future of the RB economy.

  Of course, this may also be a short-term behavior. Selling high and buying low is one of the most common means of manipulating stock prices in the market.

  In any case, the index is indeed falling.

   This is definitely great news for the bears of the futures index.

  Due to the relatively late entry, Jim and his team only had a total position of about 100,000 lots in the March futures contract. With the help of the stock market's decline in the past few days, they once again made a profit of more than one billion US dollars.

  Similarly, Zhongshi’s funds also made a profit of 100 million US dollars. Different from the short position with a heavy position, Zhong Shi was easy to turn around due to his small position. On the 26th, he quickly emptied the March contract and placed a heavy position on the April contract.

  After a few days of slump, the RB stock market finally reacted strongly. In the next few trading days, the Nikkei index rose strongly, and finally rose back to 34519 points on the last trading day of February.

  The news that the Chicago Mercantile Exchange (CME) in the United States will launch Nikkei futures has finally been confirmed. As soon as the news that CME will launch Nikkei futures and options in September, the market panic once again arose.

   It should be said that after the previous rumors, the market has been fully prepared for this news. It stands to reason that the RB stock market should not have large fluctuations at this time, but the fact is just the opposite.

  After 20 trading days of slight fluctuations in February, the Nikkei index turned downward again. This time it was not due to rumors, but a large number of Nikkei options began to play a role.

  Two or three years ago, international investment banks began to sell this kind of Nikkei index options in the RB market. The target of this option is not a illusory index, but an index futures corresponding to an agreed price.

  In January, these options began to be sold in the OTC market, specifically operated by Goodman Company, which added the halo of the European royal family and greatly improved its credit rating.

   How does it work?

  Excluding the put option of Stanley, in fact, when the stock market is rising rapidly, many local companies in RB raise funds in the capital market (not limited to the stock market, and many of them are in the bond market). They promised that if the Nikkei fell when the loan came due, the company would compensate for the loss.

  This part of the loss is to make up for the opportunity cost of investing in other places due to the purchase of bonds.

  The essence of this commitment is that RB's company issued a bond with a put option. Bonds have to repay the principal and interest, and whether this put option will be fulfilled depends largely on the performance of the Nikkei index.

   But at the time, the Nikkei was so strong that not many people believed it was going to fall, so these put options were cheap, even to the point of outrageous.

  In this case, international investment banks have purchased a large number of this product, that is, Nikkei index put options, so what are they going to do? Are they planning to bet against RB?

  No, international investment banks generally do not put themselves in a dangerous situation, especially against the entire huge RB market. Based on certain characteristics of these Nikkei put options, these Ivy League bankers design financial products similar to this kind of thing, and then sell these things.

  In this way, the risk is hedged, and a large profit is made from the price difference and handling fees.

Moreover, international investment bankers operate in two different markets and use different currencies. One is the Nikkei put option denominated in yen, and the other is the Nikkei put option denominated in U.S. dollars. options. Their wishful thinking is that once the RB market falls, the yen is likely to depreciate due to economic pressure, so that international investment banks may receive yen from RB, and then pay it in dollars to other markets. investor.

  In this way, the profits earned by international investment banks may be forced to spit out, or even pay a lot of money back.

   Therefore, when designing put options, a clause must be added in it, that is, the proceeds of these warrants must be converted into US dollars at a predetermined exchange rate.

After everything was set up, Goodman Company paid an additional fee to the Royal Danish Bank, and the bank guaranteed that these warrants would be honored when they expired. These options will expire in early 1993 for a period of two years .

  Because there is indeed such a possibility in the market that the RB market will fall wildly, and the financing RB company will therefore be unable to pay the previous commitments. At this time, the Kingdom of Denmark Bank needs to come forward.

International investment bankers took advantage of the different views of the two markets to process the bonds with put options purchased at a low price from the RB market into Nikkei index put options, and then sold them at a higher price in the U.S. market .

  In this case, the more such financial derivatives, the better.

The only risk left now is that international investment banks may shrink the funds obtained in RB companies due to the depreciation of the yen. After all, they have already set specific exchange rates with those participants in the US market. , Now they only need to carry out corresponding hedging in the exchange rate futures or options market, which will not trouble them.

  Other investment banks are not fools, and soon understood the principle, and copied them one after another, and soon these Nikkei put options flooded.

In addition to the options of Goodman Company, there are also the betting options directly advocated by Stanley Company and Salomon Brothers in RB Company. Although these options are a little different from the options of Goodman Company, they are essentially abroad. A VAM agreement was cleverly set up between investors and RB's local companies.

  In addition to these variant options, there is also suppression in the futures index market and selling in the RB stock market.

  Especially in the seats of foreign capital on the Osaka Exchange, financing is long when the stock market is rising, and securities lending is short when the stock market is falling. To some extent, it also promotes rapid changes in the stock market. (In order to thank the recommendation votes for more than 5,000, there are two updates today. I would like to thank all book friends for their support. The author will continue to work hard. Finally, I would like to thank book friend Aline for her evaluation vote.)

  (end of this chapter)