...Lesson 4 Call Money After reading this lesson, you will be conversant with: Participants and Purpose of Call Market Developments in Indian Call Market Role of Reserve Bank of India Call Markets in Other Countries Treasury Management: Theory and Practice Introduction The call money market is a part of the money market and refers to the overweight funds lent and borrowed, mostly by banks for daily liquidity management. Call/Notice money is an amount borrowed or lent for a very short period. If the period is more than one day and up to 14 days it is called „Notice Money‟, otherwise the amount is called „Call Money‟. Under call money market, funds are transacted on overnight basis and under notice money market, funds are transacted for the period between 2 days and 14 days. The call money market is most liquid of all short-term money market segments and it is also the most sensitive barometer measuring the liquidity conditions prevailing in financial markets. The call money is the money repayable on demand. The maturity period of call loans varies between 1 to 14 days. The money that is lent for one day in call money market is also known as „overnight money‟. The number of days is specified and the call money has to be repaid on the due date. The intimation for repayment enables the borrower to arrange the money on the due date and the duration of notice money is similar to that of call money i.e., up to 14 days. Therefore, the notice money is not seen in the market. The...
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...Purpose of Call Money Market Characteristics • Maturity: The maturity of the call money market instruments are varying between a day to a fortnight. As it consists with the day-to-day surplus funds, so its payable on demand at the option of either the lender or the borrower. • Liquidity Nature: All the instruments of this market are highly liquid and their liquidity being exceeded only by cash. • Yield: It includes the rate of interest paid on call loans and its also known as Call Rates. The call rate is highly variable from day to day and often from hour to hour. It may vary from centre to centre also. It is very sensitive to the changes in demand for and supply of call moneys. • Location of Transaction: The call money market is mainly located in big industrial and commercial centers. • Volume of Call Money to be Transacted: The volume of call loans depends on the extent of deposits accrual, the possibility of quick investment in and liquidation of other money market instruments, timing of advance tax payments and seasonal fluctuations in demand for credit etc. • Risk: This includes the flexibility of call money rate. As it is volatile in accordance with the difference in Trading Centers & Bank Rate so any removal of ceiling in these centers, the call money rate is supposed to be fluctuated widely. Beside these, the large amount of borrowings by banks an certain dates to meet CRR requirements, overextended credit...
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...currency derivatives Futures contracts Options Chapter 9: Interest rate and currency swap Interest rate risk management FRAs Interest rate futures (not examinable) Swaps 2 Foreign Currency Derivatives Financial management of the MNE in the 21st century involves financial derivatives. These derivatives, so named because their values are derived from underlying assets, are a powerful tool used in business today. These instruments can be used for two very distinct management objectives: Speculation – use of derivative instruments to take a position in the expectation of a profit Hedging – use of derivative instruments to reduce the risks associated with the everyday management of corporate cash flow 3 1 Foreign Currency Derivatives Derivatives are used by firms to achieve one of more of the following individual benefits: Permit firms to achieve payoffs that they would not be able to achieve without derivatives, or could achieve only at greater cost Hedge risks that otherwise would not be possible to hedge Make underlying markets more efficient Reduce volatility of stock returns Minimize earnings volatility Reduce tax liabilities Motivate management (agency theory effect) 4 Foreign Currency Derivatives What are they? Forward contracts Futures contracts Options Swaps 5 Foreign Currency Futures A foreign currency (FX) futures contract is an alternative to a forward contract that calls for future delivery of a standard amount of foreign exchange at a fixed...
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...not the obligation to perform a certain action. More specifically in finance it means that if we buy a call option we have the right but not the obligation to buy: a fixed amount; at a fixed time; at a fixed price; of the underlying instrument. On the other hand if we buy a put option we have the right but not the obligation to sell: a fixed amount; at a fixed time; at a fixed price; of the underlying instrument. TABLE 1: OPTION TERMINOLOGY Call option Put option Exercise price/Strike price In the money Out of the money American Option European Option Premium Traded Option Over the counter option Let us commence with a summary of the terminology surrounding options. This is given in Table 1 and many of the terms should be familiar from the foreign exchange and interest rate exposure sections of the syllabus. USES OF OPTIONS Options have two major uses on financial markets, speculation and hedging. Figure 1 gives an example of how speculators can use options to gamble on share price movements. It will be noted that the payoff from the option investment is far more volatile than from the straight share. This is because with the option, Barney is specualting on the movement in the share price rather than the share price itself. He has effectively geared up his investment. This is a very high-risk strategy and Barney could quite easily lose all of his money. Figure 2 gives a...
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...other words delta is approximation of the chance of an option expiring in the money as delta of calls and puts are closely related for same Strike price (Put–Call Parity) and depending on Theta and Vega of the option. * Delta is sensitive to changes in volatility and time to expiration If expiry time or volatility is more there is less certainty about whether the option will be ITM or OTM at expiration, and is reflected by delta of their call and put options. * As time passes, the delta of in-the-money options increases and the delta of out-of-the-money options decreases. As volatility falls, the delta of in-the-money options increases and the delta of out-of-the-money options decreases. * Delta may be more sensitive to time until expiration and volatility the further in the money or out of the money the option is. * The rate of increase for delta of in the money option is more than the rate of decrease of delta of out of the money option. Graph: Call and Put option Delta Value Delta of Call options: * Value ranges from 0 to 1. * It is equal to slope of the price curve (payoff diagram of the call option). * Direct relationship between call and asset price (increases from 0 to 1 as the asset price increases). * Delta is close to 1 when call is deep in the money; moves to 0.5 when call is at the money and moves closer to 0 as it moves deep out of money. * In BSM model it is defined by N(d1). Delta of Put options: * Value...
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...gross domestic products (GDP), the real GDP, the nominal GDP, the unemployment rate, the inflation rate, and the interest rate. There are also many different examples of economic activities. Groceries, massive layoff of any employees along with any decreases that may accrue in the taxes are all activities that can affect someone’s business, someone’s household or even the government. They are all related in some way or another. The Gross Domestic Product can also be called GDP for short. The GDP is the market value of any of the final services or goods that within the year was produced in the economy. The real GDP is from the current year that is inflation adjusted that measures the reflects the services and goods value. The nominal GDP is when the gross domestic product is figured out but has not even been adjusted for any inflation. The unemployment rate is the total amount of the labor force that does not have a job but are wanting and looking for a job. The inflation rate is the inflation or the rate being measured to see about any price increases. The interest rate is a current rate that is paid for using the money that was charged at an earlier time. The economic activities is when someone can provide goods to someone else that they hunt, fish, or make themselves. For example, hunting, fishing, manufacturing or even mining. With purchasing groceries that would help the government being in money. Purchasing of groceries is one economic activity that everyone does. An...
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...had accepted floating exchange rates. Today the exchange market is the largest market in the world. The market is an elaborate network of trading desks, banks, cooperations and individuals who buy and sell currencies all over the world. 2) What is an Exchange Rate? An Exchange rate is the price of a currency. The rates are available from many print and electronic sources. Direct quotes = Exchange rates that are listed in the form of “US $ Equivalent” Indirect quotes = Rates listed in the form of “Currency per US” 2.1 ) Cross Exchange rates Most quotations in exchange rates tables are expressed in terms of the US dollar. But some occasions require exchange rates expressed in term of two non-US dollar currencies. These rates are called cross exchange rates. 2.2) Bid/Ask Spread When banks or brokers facilitate currency transactions they charge a fee for their service. In many cases these fees come from the difference between the bank´s bid and ask quotes -> called the bit/ask spread. 3) Exchange Rate Movements Prices and currencies can fluctuate. 3.1) Currency Appreciation and Depreciation Appreciate= a currency in value relative to other currencies. Depreciate= a currency decreases in value A purchasing power of one currency relative to another currency can appreciate or depreciate. 3.2) Measuring Fluctuations Exchange rate fluctuations are often presented...
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...asset’s price rises by 1 dollar. Values of delta: calls vs. puts Delta of a call option can reach values from 0 to +1. It is never negative, as call options increase when underlying asset’s price rises (see why). It is never greater than 1, as the rate of the option’s price movement is never greater than the rate of the underlying’s movement (see why for ITM and OTM options). Delta of a put option ranges from -1 to 0, as put options tend to appreciate when underlying stock goes down. Again, the rate at which the option’s market price moves is never greater than the underlying’s price change, therefore a put option’s delta is never lower than -1. Delta and moneyness Just by looking at the delta, you can tell if the option is in the money, out of the money, or just about at the money. * Far out of the money options have delta close to zero (far out of the money options have little value and they hardly move). * Deep in the money call options have delta close to +1 (the option’s market price moves almost as much as the underlying’s price). * Deep in the money put options have delta close to -1 (the option’s market price moves almost as much as the underlying’s price, but in the opposite direction). * At the money options have delta about 0.50 (or -0.50 for puts). Therefore, if the absolute value of an option’s delta is lower than 0.50, the option is out of the money. If it is higher than 0.50, it is in the money. This simple rule doesn’t work 100% of time, especially...
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...Chapter 5 Questions – January 31 1. Which of the following bonds has the greatest interest rate price risk? |a. |A 10-year $100 annuity. | |b. |A 10-year, $1,000 face value, zero coupon bond. | |c. |A 10-year, $1,000 face value, 10% coupon bond with annual interest payments. | |d. |All 10-year bonds have the same price risk since they have the same maturity. | |e. |A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments. | 2. Amram Inc. can issue a 20-year bond with a 6% annual coupon. This bond is not convertible, is not callable, and has no sinking fund. Alternatively, Amram could issue a 20-year bond that is convertible into common equity, may be called, and has a sinking fund. Which of the following most accurately describes the coupon rate that Amram would have to pay on the convertible, callable bond? |a. |Exactly equal to 6%. | |b. |It could be less than, equal to, or greater than 6%. | |c. |Greater than 6%. ...
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...find is often biased. At many websites, the only products or sellers listed are ones that pay to advertise. Before buying anything on the Internet, check several websites and make sure you deal with reputable dealers. Transportation Airline Fares 1. Compare low-cost carriers with major carriers that fly to your destination. Remember, the best fares may not be out of the airport closest to you. 2. You may save by including a Saturday evening stay-over or by purchasing the ticket at least 14 days in advance. Ask which days of the week and times of the day have the lowest fare. 3. Even if you are using a travel agent, check airline and Internet travel sites, and look for special deals. If you call, always ask for the lowest fare to your destination. Car Rental 4. Since car rental rates can vary greatly, compare total price (including taxes and surcharge) and take advantage of any special offers and membership discounts. 5. Rental car companies offer various insurance and waiver options. Check with your automobile insurance agent and credit card company in advance to avoid duplicating any coverage you may already have. New Cars 6. You can save thousands of dollars over the lifetime of a car by selecting a model that combines a low purchase price with low depreciation, financing, insurance, gasoline, maintenance, and repair costs. Ask your local librarian for new car guides that contain this information. 7. Having selected a model and options you are interested in, you...
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...Project Report on Derivatives | Introduction to Futures & Options 1.0INTRODUCTION In recent times the Derivative markets have gained importance in terms of their vital role in the economy. The purpose of this report to get an orientation to the derivatives and develop a basic understanding of what it is and how does it work. Derivatives are financial instruments, which derive their value from an underlying asset. The underlying asset can be bullion, index, share, bonds, currency, interest, etc. Derivatives are likely to grow even at a faster rate in near future. The emergence of the market for derivatives products, most notably futures and options, can be tracked back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. By their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking-in asset prices. As instruments of risk management, these generally do not influence the fluctuations in the underlying asset prices. However, by locking-in asset prices, derivative product minimizes the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors. However, the use of F&O has grown into other segments like leveraged trading and arbitrage. 2.0 OBJECTIVES OF THE REPORT: ...
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...Tutorial Answers 6 1. Transaction Exposure. Fischer Inc., exports products from Florida to Europe. It obtains supplies and borrows funds locally. How would appreciation of the euro likely affect its net cash flows? Why? ANSWER: Fischer Inc. should benefit from the appreciation of the euro, because it should experience a strong demand for its products when the euro has more purchasing power (can obtain dollars at a low price). 2. Transaction Exposure. Aggie Co. produces chemicals. It is a major exporter to Europe, where its main competition is from other U.S. exporters. All of these companies invoice the products in U.S. dollars. Is Aggie’s transaction exposure likely to be significantly affected if the euro strengthens or weakens? Explain. If the euro weakens for several years, can you think of any change that might occur in the global chemicals market? ANSWER: If the euro strengthens, European customers can purchase Aggie’s goods with fewer euros. Since Aggie’s competitors also invoice their exports in dollars, Aggie Company will not gain a competitive advantage. Nevertheless, the overall demand for the product could increase because the chemicals are now less expensive to European customers. If the euro weakens, European customers will need to pay more euros to purchase Aggie’s goods. Since Aggie’s competitors also invoice their exports in dollars, Aggie Company may not necessarily lose some of its market share. However, the overall...
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...Chapter 9 Derivatives: Futures, Options, and Swaps Chapter Overview This chapter provides an introduction to derivatives, and examines both their uses and abuses. Reading this chapter will prepare students to: * Explain derivatives. * Understand how derivatives can be used to transfer risk. * Analyze the pricing of derivatives. Chapter Outline I. The Basics: Defining Derivatives A. Derivatives are financial instruments whose value depends on (i.e., is derived from) the value of some other underlying financial instrument or asset (these include stocks or bonds as well as other assets). B. A simple example is an interest rate futures contract, which is an agreement between two investors that obligates one to make a payment to the other depending on the movement in interest rates over the next year. C. Such an arrangement is very different from the purchase of a bond for two reasons: a. Derivatives provide an easy way for investors to profit from price declines, as opposed to the purchase of a bond, which is a bet that its price will increase. b. In a derivatives transaction, one person’s loss is always the other person’s gain. D. Derivatives can be used to speculate on future price movements, but because they allow investors to manage and reduce risk, they are indispensable to a modern economy. E. The purpose of derivatives is to transfer risk from one person or firm to another, providing a kind of insurance. ...
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...performance in accordance with the terms of the contract occurs at a subsequent future time • Futures – type of forward contract with standardized and closely specified contract terms – – – – Traded in organized exchange Standardized, specific quantity, delivery date, mechanism Performance guaranteed by clearinghouse Margins – good faith deposit with the exchange • Option – the right to purchase underlying good at a specific price until a specific date – Calls and Puts • Swaps – Agreement between two or more parties to exchange sequence of cash flows over a period in the future 3 Derivatives - Applications • Price risk elimination • Speculation • Market completeness • Information efficiency • Trading efficiency 4 Derivatives - Markets • Commodity Derivatives: underlying asset a commodity – Agricultural products like wheat, soybeans, rapeseed, cotton – Precious metals like gold, silver – Energy products like crude oil, natural gas, coal, electricity • Financial Derivatives – Equities, interest rates, exchange rates – Volatility Levels – Cash settlement • Regulatory – SEBI • Exchanges – NSE, BSE, MCX 5 Derivatives – Market...
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