1. FUTURES AND SWAPS
SUBMITTED BY:-
SUPRIT

2. Contents
• Derivatives Introduction
• Participants
• Forward Contracts
• Options
• The Future Contracts
• Key elements, content & types of Futures
• Different positions in Future contracts
• Future v/s Forwards

3. • Difference between Future & Options
• Money making through Futures
• Pricing and Pay-off of Future Contracts
• Clearinghouses
• Uses & Functions of Future Contracts
• Complications in Future Contracts
• SWAPS
• Size of swap market
• Types of Swap
• Risks in Swap Contracts
• Conclusion

4. Objective of Presentation
• To have a brief introduction about the Future
and Swap contracts.
• To have a brief knowledge about the types,
markets, constraints and risks in Future &
Swap Contracts.

5. DERIVATIVES
• A financial contract of pre-determined duration,
whose value is derived from the value of an
underlying asset
• The asset may be:-
 Securities
 commodities
 bullion
 precious metals
 currency
 livestock
 index such as interest rates, exchange rates , etc

6. What do derivatives do?

7. Derivatives and Market

8. Types of Derivatives

9. PARTICIPANTS

10. DERIVATIVE INSTRUMENTS

11. Forward Contracts
• A one to one bipartite contract, which is to be
performed in future at the terms decided
today.
• Product ,Price ,Quantity & Time have been
determined in advance by both the parties.
• Delivery and payments will take place as per
the terms of this contract on the designated
date and place.

12. Options
• An option is a contract giving the buyer the
right, but not the obligation, to buy or sell an
underlying asset at a specific price on or
before a certain date.
• An option is a security, just like a stock or
bond, and is a binding contract with strictly
defined terms and properties.

14. Future Contracts

15. Key Elements of Futures

16. Content of a Future Contract

17. Types of Futures Contracts

18. Future Contracts: Physical Commodity
• Contracts on physical commodities include:

19. Future Contracts: Physical Commodity

20. Futures Contracts: Foreign Currency and
Interest-Earning Asset
Foreign Currency Interest-Earning Assets
Australian dollar Treasury bills
Brazilian Real Notes
Russian Ruble Bonds
New Zealand dollar Eurodollar deposits
Swedish Krona Interest rate swaps
South African Rand Fed funds
Norwegian Krone Municipal bonds
British pound
Canadian dollar
Japanese yen
Swiss franc
Mexican peso
Euro

21. Futures Contracts: Index Based
• Traders must fulfill their obligation by reversing
trade or cash settlement at the end of trading.
EXAMPLE OF INDEX BASED CONTRACTS
US Exchanges Foreign Exchanges
Broad-Based stock indexes Foreign Stock Indexes
S&P 500 British FTSE 100
Dow Jones Industrial Average French CAC 40
Russell 2000 Dow Jones Euro Stoxx 50
NASDAQ 100 German DAX
Style-Based Indexes Brazillian Bovespa stock
S&P Barra Growth Japanese Nikkei 225
S&P Barra Value Korean KOSPI 200

22. Positions in a futures contract

23. Futures v/s Forwards

24. Forward Versus Futures
Chapter 1 24

25. Futures vs. Forwards
Advantages/Disadvantages

26. DIFFERENCE BETWEEN FUTURES
& OPTIONS
FUTURES OPTIONS
Futures contract is an agreement to In options the buyer enjoys the right
buy or sell specified quantity of the and not the obligation, to buy or sell
underlying assets at a price agreed the underlying asset.
upon by the buyer and seller, on or
before a specified time. Both the
buyer and seller are obliged to
buy/sell the underlying asset.
Unlimited upside & downside for both Limited downside (to the extent of
buyer and seller. premium paid) for buyer and unlimited
upside. For seller (writer) of the
option, profits are limited whereas
losses can be unlimited.
Futures contracts prices are affected Prices of options are however,
mainly by the prices of the underlying affected by a)prices of the underlying
asset asset, b)time remaining for expiry of
the contract and c)volatility of the
underlying asset.

27. How does one make money in a
futures contract?

28. Pricing of Futures
• for a simple, non-dividend paying asset, the
value of the future, will be found by
compounding the present value S(t) at
time t to maturity T by the rate of risk-free
return r.
• F(t) = S(t)(1 +r)(R+r)

29. • With continuous compounding
• F(t) = S(t) er(T-t)

30. Payoffs for futures contracts
Payoff F0 = Contract price at time 0
Payoff
F1 = Future price at time 1
F1 Sell futures
Buy futures
0 F 0 F
F0 F0
-F1
Gain if interest rates Gain if interest rates
fall and prices rise of rise and prices fall of
debt securities. debt securities.

31. Futures Contracts
Payoff Profiles
profit Long futures
profit Short futures
F(0,T) F(1,T) F(0,T) F(1,T)
The long profits if the next day’s futures The short profits if the next day’s
price, F(1,T), exceeds the original futures price, F(1,T), is below the
futures price, F(0,T). original futures price, F(0,T).
©David Dubofsky and 6-31
Thomas W. Miller, Jr.

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33. Clearing houses

34. Major Futures Clearing Organizations
M jo F tu e C a in O g n a n
a r u r s le r g r a iz tio s
Clearinghouse Affiliated Exchanges
The Clearing Corporation (CCorp) US Futures Exchange and the
Merchants Exchange of St. Louis
Chicago Mercantile Exchange Chicago Mercantile exchange
Clearinghouse With clearing link to CBOT
Kansas City Board of Trade Clearing Kansas City Board of Trade
Corporation
Energy Clear Corporation Exempt Commercial Markets
MGE Clearinghouse Minneapolis Grain Exchange
NYMEX Clearinghouse New York Mercantile Exchange
New York Clearing Corporation New York Board of Trade
The Options Clearing Corporation OneChicago, NQLX, & option
exchanges
The London Clearinghouse
Exempt Commercial Markets and
OTC markets
Sources: The CFTC web site, www.cftc.gov.

35. Uses of Futures

36. Social Functions of Futures
• Futures contracts meet the needs of three
groups of users

37. There are two main social functions of
futures markets:

38. Future Contracts helps in :-

39. Complications in using
financial futures

40. For More Information
• The major futures exchanges have websites. For links to some of
them, see: http://www.numa.com/ref/exchange.htm.
• The exchanges offer many free brochures, booklets and information.
Call them (or go to their websites) to get catalogs. For example:
– CBOT: 1-800-843-2268 (1-800-THE-CBOT)
– CME: 1-800-331-3332
©David Dubofsky and 6-40
Thomas W. Miller, Jr.

42. Introduction
• A swap is an agreement between counter-parties to
exchange cash flows at specified future times
according to pre-specified conditions.
• A swap is equivalent to a coupon-bearing asset plus a
coupon-bearing liability. The coupons might be fixed or
floating.
• A swap is equivalent to a portfolio, or strip, of forward
contracts--each with a different maturity date, and
each with the same forward price.

43. Facts about Swaps

44. Size of the Swap Market
• In 2007 the notational principal of:
Interest rate swaps was $271.9 trillion USD.
Currency swaps was $12 trillion USD
• The most popular currencies are:
– U.S. dollar
– Japanese yen
– Euro
– Swiss franc
– British pound sterling

45. The Swap Bank
• A swap bank is a generic term to describe a
financial institution that facilitates swaps
between counterparties.
• The swap bank can serve as either a broker
or a dealer.
– As a broker, the swap bank matches counterparties
but does not assume any of the risks of the swap.
– As a dealer, the swap bank stands ready to accept
either side of a currency swap, and then later lay off
their risk, or match it with a counterparty.
14-45

46. Types of Swaps

47. Interest Rate Swap
• There are two types of interest rate swaps:

48. Interest Rate Swap
– Counterparty A is called the fixed rate payer or swap buyer
– Counterparty B is called the floating rate payer or swap
seller
Fixed rate payments
Counterparty A Counterparty B
Floating rate payments

49. Interest rate SWAP
13.1% Bank Libor
Bank makes
debt
Firm A payments Firm B
Libor + 1% 12%
Starting conditions: Starting conditions:
Firm A borrows floating rate Firm B borrows fixed rate 12% bonds
bank loan at Libor + 1% (AAA bonds with no premium for risk)
(premium for risk)

50. Typical Uses of an
Interest Rate Swap

51. Currency Swap
• There are four types of basic currency swaps:

52. Typical Uses of a
Currency Swap

53. Risks of Interest Rate
and Currency Swaps

54. Swap Market Efficiency
• Swaps offer market completeness and that
has accounted for their existence and growth.
• Swaps assist in tailoring financing to the type
desired by a particular borrower. Since not all
types of debt instruments are available to all
types of borrowers, both counterparties can
benefit (as well as the swap dealer) through
financing that is more suitable for their asset
maturity structures.
14-54

55. Concluding Remarks