Financial Derivatives Market Research Articles

Influence of Hedging Cost upon Weather Derivatives Pricing

Weather derivatives play a major role in risk management of non-catastrophic weather market. The healthy development of the derivatives market is inseparable from the reasonable pricing of the product itself. As non-traditional financial derivatives, weather derivatives can provide a good risk hedging. Meanwhile, in the weather derivatives market, brokers play an even more important part than in the traditional financial derivatives market. Therefore, when pricing weather derivatives, we must take two factors into consideration, namely, brokers as market makers as well as the impact of their hedging cost on weather derivatives pricing. Based on the expected claims and risk payment of basic derivatives contracts, this paper is going to discuss weather derivatives pricing on the basis of hedging costs, while taking into account the impact of market makers’ hedging costs, risk aversion and existing positions.

Проблемы финансирования инфраструктурных проектов в России

В статье обозначаются глобальные и специфические для России проблемы развития инфраструктуры. В качестве решения проблем развития инфраструктуры предлагается использовать механизмы государственно-частного партнерства, развитие рынка производных финансовых инструментов и усиление рыночной конкуренции в России. Результаты исследования могут быть использованы при формировании программы финансирования инфраструктурных проектов.

Recent Reglementation of Derivatives Markets to Answer Market Disturbances

Abstract Financial derivatives market has become very popular with the trigger of the most destructive financial crisis since the Great Depression of 1929. There were many voices who stated that these instruments have been guilty for the market disturbances. Maybe not the derivatives themselves have caused the recent crisis but their regulation and their use. Therefore, regulators have become concerned in identifying gaps in the existing laws and regulations and proposing solutions in this regard. The regulatory reform on OTC derivatives market has already an impact on market volume and structure. The aim of this paper is to present a review of the most recent actions and decisions of regulatory authorities in the field.

Study of American Option Pricing Based on Levy Process

After the 2008 financial crisis, the global derivatives trading volume in options proportion is growing, more and more investors build portfolios using options to hedge or arbitrage, our futures and stock options will soon open. Theoretical research of options is also changing, option pricing models under Levy processes developed rapidly. In this context, a review of the China's warrants market and the introduction of option pricing models can not only help us to reflect Chinese financial derivatives market regulation, but also to explore the option pricing theory for China`s financial market environment. In the framework of Monte Carlo simulation pricing, we established mufti-Levy process option pricing models, the structural model for the given parameter estimation and risk-neutral adjustment method are discussed, the last part of this chapter is an empirical analysis of China warrants trading data in order to prove the validate of Levy models.

Empirical Research on Chinese Warrants Market Based on the Montecarlo Pricing Options Under Levy Process

After the 2008 financial crisis, the global derivatives trading volume in options proportion is growing, more and more investors build portfolios using options to hedge or arbitrage, our futures and stock options will soon open. Theoretical research of options is also changing, option pricing models under Levy processes developed rapidly. In this context, a review of the China's warrants market and the introduction of option pricing models can not only help us to reflect Chinese financial derivatives market regulation, but also to explore the option pricing theory for China’s financial market environment. In the framework of Monte Carlo simulation pricing，we established mufti-Levy process option pricing models, the structural model for the given parameter estimation and risk-neutral adjustment method are discussed, the last part of this chapter is an empirical analysis of China warrants trading data in order to prove the validate of Levy models.

Option Pricing Variance Reduction Techniques Under the Levy Process

After the 2008 financial crisis, the global derivatives trading volume in options proportion is growing, more and more investors build portfolios using options to hedge or arbitrage, our futures and stock options will soon open. Theoretical research of options is also changing, option pricing models under Levy processes developed rapidly. In this context, a review of the China's warrants market and the introduction of option pricing models can not only help us to reflect Chinese financial derivatives market regulation, but also to explore the option pricing theory for China`s financial market environment. In the framework of Monte Carlo simulation pricing, we established mufti-Levy process option pricing models, the structural model for the given parameter estimation and risk-neutral adjustment method are discussed, the last part of this chapter is an empirical analysis of China warrants trading data in order to prove the validate of Levy models. Key word: Levy stochastic processes, option pricing models, Chinese warrants market, American option pricing, risk-neutral adjustment, variance reduction techniques.

Evaluation of the effectiveness of methods of the imperfect hedging of financial options on the Russian forward market

Under unstable economic conditions, interest in the financial derivatives market is easy to understand. On the Russian forward market, derivatives such as options and futures are gaining increasing popularity as a means of managing the risks of business units in order to protect against possible financial losses. The competition created among the organizers of forward trading has encouraged the emergence of a technically effective trading method and an expanded range of available financial instruments. The need for an expanded range of risk-management instruments and the introduction onto the market of cutting-edge methods relying on a strict formalization of investor decisions has determined the current relevance of the article at hand. The aim of the article involves studying the latest methods of hedging financial options, comparing and contrasting the new methods with those traditionally used in the financial industry, and analyzing the opportunities for applying methods of imperfect hedging on the Russian forward market.

Necessity of the Establishment of a Financial Derivatives Market in Bangladesh

Derivatives instruments have been a feature of modern financial markets for several decades. They play a pivotal role in managing the risk of underlying securities such as bonds, equity, equity indices, currency, and short-term interest rate asset or liability positions. With the development of Bangladesh’s market economy, it is now becomes very essential of the establishment of a financial derivatives market in this country. In our article is has been tried to explain in detail the theoretical framework of various types of derivatives and their potential usage in strengthening capital market, capital structure of commercial banks, against the fluctuation of major import(petroleum) and export(RMG) sectors, and thus turning Bangladesh’s economy into a strong global one. In the last part of our study, some strong recommendations with the suggestion of phase by phase establishment of a financial derivatives market are included.

A Study on Tax Plan in Historical Development of Financial Derivatives Market and Transaction

A Study on Tax Plan in Historical Development of Financial Derivatives Market and Transaction

Freight-Forward Agreement Time series Modelling Based on Artificial Neural Network Models

Over the last thirty years, there has been an extraordinary growth in the financial derivatives market, in the field of shipping. This can be attributed to the fact that financial derivatives are contracts that allow all players participating in the shipping market to reduce their exposure to fluctuations in freight rates, bunker prices, interest rates, foreign exchange rates and vessel values. This paper employs an artificial neural network (ANN) in order to forecast the future price of freight derivatives. More specifically, drawing on historical data for the period between January 2005 and March 2009, an ANN is built and trained, and its estimates lead to two individual results. The resulting model indicates to the investor which position to take in the derivatives market (short for sale of agreements and long for the purchase of agreements).

Interim Contracting (or Ex Tempore Contracting)

This Article argues that a cornerstone assumption of contemporary contracts scholarship is misleading and limited. Leading academic commentary explicitly assumes that contractual responsibilities are determined in the following way: parties determine many of their duties ex ante, by specifying terms at the time of contract formation, and the rest of the terms they leave vague, for a court to specify ex post if it should prove important. This ex ante/ex post dichotomy is the guiding framework in attempts to understand contract design and interpretation. For example, parties use terms like “merchantable” quality when the cost of being more specific up front is higher than the cost of relying on a court to later elaborate its meaning. Yet this dichotomy obscures a third, “real-time” approach to contracting: parties frequently leave terms unspecified and delegate ongoing determination to someone other than a court. This Article identifies this phenomenon, which can be called – as opposed to ex ante and ex post – “ex tempore” contracting. Using a unique cache of data only recently made available, this Article explores ex tempore contracting through a novel dispute management system now prevalent in the construction industry, called a “dispute board.” These expert panels radically reduce the cost and frequency of litigation by determining the parties’ responsibilities whenever the parties wish, including in the course of performance. Ex tempore contracting is not merely a dispute resolution system for the construction industry. Ex tempore contracting is also essential to the massive financial derivatives market and countless other transactions. This Article develops important insights for judicial interpretation of contracts and the scholarly analysis thereof. For example, the possibility ex tempore contracting casts doubt on the wisdom of information-forcing penalty defaults and urges courts to enforce ex tempore contracting clauses much more often than they currently do.

A Social Approach to the Financial Derivatives Markets

This essay uses the credit crisis as an example to illuminate what a social approach to the financial markets would look like. We sketch out a theoretical and thematic journey whose end is to make the social so visible that a better appreciation of the financial field comes into focus. To do this, we foreground the issues of the production of the market (as a socially imagined totality), the evolution of a habitus of work founded on a speculative ethos, and the construction of an economistic ideology (or illusio) that conceals the social character of financial markets and financial work. Theoretically, we fashion a more social account by developing a notion of performativity that does away with the (now conventional) opposition between the objective structure of the market and the subjective agency of its participant.

Sustainable Development: A Study of Indian Financial Derivatives Market

The world financial market has undergone qualitative changes in last three decades due to phenomenal growth of derivatives, which play a significant role in implementing financial policies. In the present business scenario, importance of derivatives market is an ingenious feat of financial engineering that provides an effective solution to the problem of risk that is embedded in the price unpredictability of the underlying asset. In India, the sustainable development of derivatives market is relatively a recent phenomenon. Since its inception in June 2000, derivatives market has exhibited exponential growth, both in terms of volume and number of traded contracts. In 8 years, derivatives trading in India has surpassed cash segment in terms of turnover and number of traded contracts.

Weather Derivatives: Usage Possibilities for the Lithuanian Economy

The impact of weather on many commercial and recreational activities is significant and varies both geographically and seasonally. Many industries, including agriculture, energy, utility, construction, tourism and other businesses, are either favourably or adversely affected by “bad” weather. For this reason, financial markets have devised a relatively new class of instruments, the so-called “weather derivatives”, the first of which were launched in 1996 in the United States. There is a number of factors behind the growth in the weather derivatives market. One of these is the deregulation of energy markets. Another one is that capital and insurance markets have come closer to each other. A weather derivative is the new­est product of the financial derivatives market. It al­lows a market participant to minimise a risk from daily weather fluctuations, while insurance companies sell insurance against catastrophic events.
 The main aim of this article is to explore possi­bilities to use weather derivatives for the Lithuanian economy. To reach the aim, the following goals were set: to describe products of weather derivatives and their features and to present the possibilities to use these derivatives in the Lithuanian economy on the basis of an example of temperature derivatives. A hypothesis is made that Lithuanian companies could discover new possibilities for business management through the use of weather derivatives.
 The methods used in the paper are as follows: comparative analysis, indexes, regression and correla­tion analysis.

Fighting the Machines: New Risks in a Transparent Financial System

Fighting the Machines: New Risks in a Transparent Financial System Grant Long (bio) Transparency became the ultimate buzzword among policymakers and bankers debating the causes of the turmoil that beset international financial markets from August 2007 well into 2009. Many argued that without the tangled, opaque web of liabilities formed by credit default swaps, collateralized debt obligations, special purpose vehicles, and various other financial derivative, securitization, and funding schemes, the financial crisis of 2007 and 2008 would never have occurred. Advocates of this point have a strong case; with a clearer picture of banks’ liabilities, the seizing of credit markets would not have been nearly as pronounced and might have been averted. The regulatory reforms passed by the U.S. Congress in the spring of 2010 put a high priority on increased transparency in financial markets, and much of the international dialogue has also focused on the need for increased transparency to enable greater market efficiency. To promote transparency, reforms have favored normally traded financial instruments over esoteric, customized securities, and promoted the establishment of entirely new central clearing systems for the previously fragmented financial derivatives market. Yet just as Congress was debating the final details of landmark financial reform legislation, the markets demonstrated the hazards of focusing exclusively on financial transparency. On 6 May 2010, in mere minutes, major financial indices dropped by as much as 10 percent. In the ensuing frenzy, analysts and journalists cited concerns over everything from the health of European banks to tensions between North and South Korea in an attempt to explain the startling decline. Over time, investigations revealed that the brief episode of panic that roiled the market that afternoon originated not in rational human concerns, but rather in mechanical error. Four months after the crash, the exact cause of the breakdown remained elusive. The difficulty in pinpointing the exact source of the crash highlights the dangers of excessive reliance on mechanical trading. This computer driven trading has become the favored engine to generate returns for many large hedge funds, and depends on simplified securities and transparent financial exchanges through which computers can analyze and submit trades in a rapid manner. [End Page 33] Though financial reform has in many ways addressed the problems of the recent financial crisis, by focusing on transparency, encouraging the standardization of financial instruments, and mandating large expansions in exchanges for financial derivatives, policymakers have increased the potential for a computer-sparked financial panic. In the same manner that experts lauded the financial innovations that drove derivative and securitization markets until 2007, bankers and economists have traditionally cheered the innovations behind the rise of computer trading. A 2009 examination by a group of Federal Reserve Board economists found that despite alarms that many had raised about the potential for mechanical trading to wreak havoc on markets, empirical evidence suggested that certain computer driven trading platforms actually reduced volatility in foreign exchange markets.1 Their analysis found that human traders, not computers, were responsible for large trades that tended to move market prices, and that in times of high market volatility, computer driven trading platforms tended to provide buyers for panicked investors. These findings echo those of other recent studies, which also cited evidence that certain computer driven trading systems tended to reduce volatility and increase efficiency in the marketplace.2 The greater market transparency advocated by policymakers in the wake of the financial crisis has the potential to facilitate these benefits of computer driven, high frequency trading systems. Yet questions remain about the possibility for computer trading to spark large-scale systematic panics in the market. The conventional wisdom—that computer driven trading contributes to the day-to-day stability of financial markets—may be comforting, but it does not fully account for the potential for isolated events to set off a systemic crisis. Empirical research finds that large-scale correlations in computer trading systems are unlikely, but this does not alone render large movements in the market impossible. Events which have a small probability of occurring at any given time have a much higher probability of occurring over longer time horizons, a lesson in probability that many traders and risk managers painfully learned in 2007 and 2008...

Analyzing the relationship between multinational corporate strategy and financial derivatives in Taiwan

This article examines the connection/relationship between multinational corporate strategy and the effect of the financial derivatives market in Taiwan. The paper uses a qualitative methodology and an interview research method to determine which types of firms would be most able to benefit from a full-fledged and open derivatives market in Taiwan. Dividing the firms into three types – multinational firms operating with branches in Taiwan; local firms operating as multinationals with branches outside Taiwan; and pure domestic firms, the paper analyzes and compares the determinants and impacts in the adoption of different forms of internationalized strategies. It is hoped that an optimized strategy can be worked out. The significance of the article is that the reaction of Taiwanese industry to derivatives could well determine the country’s economic performance in the 21st century Most commentators agree that derivatives will play a major role in the future with derivatives markets enjoying vast amounts of equity. Taiwan has all the equipment, infrastructure, advanced technology and skilled labor to benefit from a mastering of the derivatives market.

Financial Derivatives Valuation

The article contains a thorough analysis of the world financial derivatives market with special reference to theoretical issues. It puts forward and traces Black-Scholes options valuation model. The author underlines particularities of advanced practical derivatives price calculation, using the math formula of the Nobel Prize winners. Some practical features of the concept and its implementation within notorious Long-Term Capital Management hedge fund are emphasized.

Exotics and Electrons: Electric Power Crises and Financial Risk Management*

This article models the decisions of a regulated utility that has the option of meeting excess demand by buying power on the spot markets. The risk associated with the cost of meeting excess consumer demand can be hedged by trading in a financial derivatives market. We show that the optimal financial hedge position for an individual utility is a nonlinear mixture of price‐risk and quantity‐risk hedging. The ability to form these hedges in financial markets can increase spot price volatility. The availability of derivatives markets can also lower the value of long‐term power contracts and baseload supply.

Liquidity costs: Screen-based trading versus open outcry

The results reported in this paper challenge the popular belief that screen-based trading offered lower liquidity costs than the open-outcry approach during its first year of side-by-side operation in the U.S. financial derivatives market. Using time and sales data from the Chicago Board of Trade (CBOT) market profile data series, effective bid–ask spreads are estimated on the basis of daily and intraday measures of the Thompson–Waller and Smith–Whaley estimators. We find liquidity costs on the screen-based system vary with time and the level of floor trading activity. In particular, a one-tick market is observed just before the opening of the Chicago trading floor (6:30 to 7:30 am). However, subsequent intraday spreads exhibit the familiar “reverse J-shaped pattern”—highest following the opening of floor trading, declining until afternoon, and then increasing until close. Meanwhile, daily spread estimates average almost a quarter-tick higher on the screen-based market relative to the one-tick spread commonly associated with open outcry. This relationship remained robust across sample time-series and conservative price-change specifications. Since the study was conducted, electronic trading has become the predominant exchange medium for financial derivatives at the CBOT, following the example set in Europe's traditional futures exchanges, e.g. France's Matif, Germany's Deutsche Bourse and the U.K.'s Liffe.

Exotics and Electrons: Electric Power Crises and Financial Risk Management

This paper models the real investment and financial portfolio decisions of a regulated utility, selling power at fixed prices to consumers and buying power in an unregulated spot market. Consumer demand is stochastic and subject to large shocks. Utilities can either meet consumers' demand by buying power on the spot market or by adding capacity. The risk associated with a surge in consumer demand can be hedged by trading in a financial derivatives market. Solving for the optimal policy for an individual utility, we show that, as power shortfalls increase, the optimal hedge position is a nonlinear mixture of price risk and quantity risk hedging. We then examine the aggregate impact of these hedging positions and show that the spot price process shifts from a marginal-cost-based regime to a regime based on aggregate financial capacity of the power industry. Although individual utilities, acting as price takers, can lower their expected power shortfalls by hedging with derivatives, derivative demand in the aggregate increases spot price volatility when power default occurs, and may thus increase the number of power defaults. At the same time, punitive regulatory penalties for power defaults may actually increase aggregate defaults by encouraging utilities to hedge outage risks through derivative markets rather than through increased capacity.