Abstract This paper discusses credit derivatives in modern banking. The paper gives a brief outline of credit derivatives, and further discusses the concept of how they function within the global market. The paper examines occurrences within banking in relation to credit derivatives and how these events have affected the worldwide opinion regarding the limitations of these transactions. The paper draws conclusions from the research provided, and offers opinions for the future of credit derivatives in banking.
From the Paper "When the economy is stable and interest rates are low, banks traditionally struggle for profits because there is not a significant need for loans from consumers or big business. In these moments of financial peace, banks needed methods that would ensure they could survive independently on the downfall of the economy in order to remain solvent. Credit derivatives were born of such concern, allowing bankers, and others, the ability to reduce their risk by selling risk to other parties. Risk was still maintained by lending institutions, but the prospect of intense profit margins was the deciding factor for most banks to begin to participate in credit derivatives. The research will demonstrate that bank use of credit derivatives has been a recorded success, and that credit derivatives continue to grow across the globe as a boom to the banking industry. However, limitations do exist connected with credit derivatives."
Abstract This paper provides an extensive review of the recent literature relevant to pricing credit derivatives. The paper discusses new developments in credit derivative pricing and explains that these new developments are those innovations that expand or clarify the existing variations models for credit derivatives.
From the Paper "The purpose of this study is to review new developments in the pricing of credit derivatives. Credit derivatives, essentially insurance against credit risk through the structuring of and trading in of synthetic financial assets, are little more than a decade old. Thus, a skeptic might state that almost anything that occurs in the credit derivative market reflects a new development. The perspective providing the focus in this study however is that new developments are those innovations that expand or clarify the..."
Abstract This paper looks at how a derivative is defined as a financial instrument, such as an option or future, that derives its value from the movement of a price, exchange rate, or interest rate associated with some other item. It provides different examples of how derivatives are used in the financial world and examines how they have been blamed for many financial scandals, such as the fall of Enron, WorldCom, and Global Crossing.
Outline
Introduction
Types of Derivatives Examples of Derivatives Accounting for Derivatives Derivatives and Scandals
Conclusion
From the Paper "Derivatives are classified into two different types. There are linear derivatives; whose payoff represents a linear function, meaning with every movement, a dollar amount is directly affected. The other form of derivative is a non-linear derivative, in which the payoff changes with time and location (Sooran, 2004). When an individual purchases shares of a company, the payoff is linear, not accounting for dividends paid. If the stock purchased increases, a profit is earned. In contrast, if the stock purchased decreases, a loss is incurred. An investor can choose options to minimize their risk when investing."
Abstract This paper defines derivatives as financial instruments such as options, futures, forwards and swaps that are derived from their underlying currencies. The returns on derivatives are tied to yields of these underlying securities and currencies. This paper details the essential role the derivatives market plays in the global economy in countries such as Asia, Germany and Switzerland, in which these economies reap substantial growth rates due to these financial practices. The writer contends that with the presence of this market the financial condition of business entities are stabilized and secure from the possibility of hedge currency risks. The derivatives market also decreases the amplitude in the fluctuation of spot prices and promotes optimal funds placing. The writer stresses the importance in the implementation and development of the currency derivatives market as a necessary prerequisite for the growth of international trade volume, expansion of foreign investment and for the general development of economy.
Table of Contents:
Abstract
Currency Derivatives Operations in the World Economy
References
From the Paper "Derivatives market in Ukraine was operating from 1994 to 1998. Unfortunately, its work was far beneath the world standards. From the very beginning the Ukrainian market was developing as an exchange market, despite the fact that the world derivatives development gained the incentive to growth from over-the-counter form of these instruments. Hedgers, a category of market subjects, almost did not participate in the activity of Ukrainian currency exchanges, and the absence of hedgers makes the market non-balanced and not liquid. Moreover, the world financial crisis of 1997 caused the collapse in currency markets. The National Bank of Ukraine made a decision to hold up and later to abolish the functioning of currency derivatives in Ukraine. We would like to underline that despite the crisis in the Russian market, the operations with currency derivatives were not stopped, but continued to develop."
Abstract The writer of this paper defines a derivative as a contract that specifies the rights and obligations between the issuer of the security and the holder, to receive or deliver future cash flows based on some future event. This paper examines the various uses for derivatives which are standardized much the same as stock futures and traded through a securities exchange or futures exchange. This paper discusses the use of derivative securities as a tool to transfer risk. For example, a business can sell futures contracts on a product to a buyer, even before that particular item hits the shelf. The writer cites the various types of derivative options, such as the swap and the forward contract, which is an agreement between two parties to buy or sell a particular asset. A swap is an agreement in which, generally two, parties agree to exchange future cash flows, arising from financial instruments. This paper details how forward contracts are implemented in the corporate business world, as was the case with Lufthansa, who contracted with Boeing to purchase aircraft in the mid-1980s. This paper delves into the process known as financial engineering, which combines options and other derivatives while at the same time controlling the risk in a given transaction. This paper also discusses how derivatives are used as an option in tax planning.
From the Paper "A common use of options for tax planing involves the deferrment of a gain from one period to another, thereby delaying the payment of taxes. For example, one company may have an investment in another company's stock that has appreciated. Company A would like to lock in the gain on Company B's stock, but does not wish to recognize the gain in the current year. It can accomplish this by using put options. This strategy would involve buying put options at the current stock price, expiring in the next fiscal year. If the stock price declines, the value of the option would increase, locking in the profit. Another strategy would be to sell a call option at the current market price. This would also lock in the gain, as any decrease in the price of the stock would be offset the increased value of the option. These strategies can also be used to reduce the risk of a drop in the stock price without regard to tax issues."
Abstract This paper begins with a brief explanation of what derivative securities are and what purpose they serve. Next, the paper briefly explains how derivative activity level can be monitored and then takes a look at the derivative disasters that befell the Baring Brothers of London and the local government of the city of Orange County. The paper explains that these disasters were a result of careless strategies with derivatives and examines the lessons learned from these two disasters. Finally, the paper suggests measures that can be taken to prevent such disasters from happening again.
From the Paper "A Derivative is a contractual relationship established by two (or more) parties where payment is based on (or "derived" from) some agreed upon benchmark. Derivatives are risk-shifting devices. They are most frequently used to reduce exposure to changed in foreign exchange rates, interest rates, or stock indexes."
Abstract This paper will probe further into the issue of risk in derivative contracts. A special focus will be given to forward exchange rates in currency markets. This is an increasingly active and volatile arena that is both interesting and important to study. Currency flows each day total well over 1 trillion dollars (US), greatly exceeding the actual value used for foreign trade. Other derivative contracts used by corporate investors will also be considered. In the final analysis, it is clear that all financial instruments are derivative contracts in one form or another. What separates them is the degree of volatility and risk. The riskier the financial instrument, the more difficult it is to establish forward rates.
Abstract The paper attempts to answer the following questions: 1) What are derivatives? 2) What purpose do they serve? 3) How are the risks calculated? 4) What methods of accounting are generally accepted? By best estimates, companies and banks around the world are involved in some 52 trillion dollars worth of financial derivatives. The paper explains these concepts and discusses their importance.
From the Paper "Since the concept behind derivatives is foreign exchange rates, then the concept really derives from 1971 when America abandoned the gold standard and fixed exchange was replaced by floating exchange. The floating exchange rate gave birth to the need for "hedging" (protecting assets against unfavorable movement). The need to hedge, in turn, gave birth to the concept of exchange rate futures, an idea that the "Merc" introduced in 1972. The "Merc" (Chicago Mercantile Exchange) first listed currency futures and the idea of selling and buying investment stakes in the future value of a nation's currency was born."
Abstract This paper explains that the swaps, or contracts for differences, defined as synthetic securities involving combinations of two or more basic building blocks, are one of several financial derivatives used either to hedge different financial risks, such as interest rate risks or currency/foreign exchange risks or to obtain financial gains when they are used as speculative instruments. The author points out that the main characteristic of financial derivatives is the fact that they all work on imperfections of the financial markets; swaps are obviously either a speculating or an arbitrage instrument, much like forwards, futures or options. The paper relates that a swap agreement is beneficial to both parties when there is a split preference for fixed or floating, induced either by the necessities of the organization or the risk management policies that the company adopts.
Table of Contents
Interest Rate Swaps
Currency Swaps
Asset Swaps
From the Paper "The figure above best explains a classical swap mechanism . Bank A has a AAA credit rating, while Bank B has a BBB credit rating. This means that Bank B will have a higher fixed rate loan and company II will prefer to loan by using variable or floating rates. These are generally reported to LIBOR and can be, in this case, LIBOR + 0.75 %. Company I will make fixed-rate loans from the AAA bank at a fixed rate of 10 %. The general idea is that bank A will make floating- rate payments to bank B, and, B will make fixed- rate payments to A. The rates that the swap bank uses enter the calculations as well."
Abstract This paper explains that the Black-Scholes method is a very famous method for the valuation of an equity share and other variables related to the value of an equity share in the future months. The author points out that the key characteristics needed for the Black-Scholes formula are the price and price volatility of the underlying stock, coupled with the available rate of return on a risk free stock, under the assumption that trading in the concerned stock, along with the ability for exercise of the option, is continuous and unrestricted. The paper relates that credit derivatives are mechanisms for the credit institutions to separate the credit risk from their loans and treat market risk as a separate category so that their pricing efficiency could be more competitive and the concerned organizations could be more competitive in the market.
From the Paper "One can even buy securities at low prices on a forward basis. Generally, these are used in a manner similar to bonds which have a benchmark of comparable maturity. Thus, a bank may buy from an investor an option on the credit spread of a BBB-rated corporate bond which has a maturity after 5 years. For this, a premium will have to be paid. At the same time, the bank will have the right to sell the bond to the investor at a certain strike price. This strike price is in terms of a difference with treasury notes, and if the actual spread on the date of maturity of the deal, is more than the strike rate specified, then the option will not be used. If the actual difference is higher, then the bond may be purchased."
Abstract This paper provides an overview of the problem facing regulators and investors in determining the financial integrity of a company today. A definition and discussion of financial derivatives and current reporting requirements for such instruments are provided, followed by an analysis of current and future trends. A summary of the research is provided in the conclusion.
From the Paper "Today, corporations are facing a dual pressure to report smooth earnings in an increasingly transparent environment. According to the CEO of a Fortune 500 firm, "[t]he No. 1 job of management is to smooth out earnings" (Barton 2001:1). Consistent with this view, several academic studies have documented that corporate managers make discretionary accounting choices, in part, to reduce earnings volatility. Certainly, earnings management is believed to be so common that the media and regulators are expressing concern about its effects on the quality of reported earnings and the functioning of capital markets in the U.S. and abroad, but to date, the media, academics, and regulators have largely focused on discretionary accounting accruals as the primary means by which managers smooth their firms' earnings. However, corporate managers can also help reduce volatility in earnings by using other tools, such as financial derivatives, that smooth their firms' cash flows (Haberman 2003). The sour taste left in investors' mouths after the collapse of Enron and their ilk, though, have raised a number of questions about whether the current requirements for reporting derivative transactions are useful to investors. To this end, this paper provides an overview of the problem, a definition and discussion of financial derivatives, current reporting requirements for such instruments, followed by an analysis of current and future trends. A summary of the research will be provided in the conclusion."
Abstract This paper explains how financial managers use financial derivatives to help them determine risks accurately and better control them. The paper explains the role financial derivatives play in this aspect of financial management and the different types of financial derivatives available. The paper also discusses the importance of understanding the intended function of derivatives and that the users of this tool take necessary precautions before using it. The paper also looks at the types of financial institutions involved with financial derivatives, explains how certain types can help financial managers hedge financial risk, and looks at the reasons for the growth in the market of financial derivatives.
Introduction
Roles of Financial Derivatives Futures and Options Can Help Risk Managers to Hedge Financial Risk
From the Paper "One of the first uses of financial derivatives was to reduce exposure to changes in rates of foreign exchange, interests, or stock market valuation. As an example take the situation of an American company has sent goods for which they will be paid in British Pounds. It has the choice or "option" of entering into a derivative contract with another party to reduce the risk of British Pound increasing in value compared to US Dollar when the payment is made. Through the use of the instrument, the party covering the risk is compelled to pay the exporter the value in American Dollars at the rate at which the instrument was finalized. Thus the derivative has shifted the exchange risk from the exporter to another party. These instruments are continually gaining in popularity and familiarity, and this increase in popularity is also increasing the variety of such instruments that are now available. One has to understand the latest uses of derivatives and the implications of the concerned transactions to get the benefit from these instruments."
Tags: instrument, value, securities, volatility, deregulation, options, asset, rate, index
This paper explores whether nitric oxide is the same substance as an endothelium-derived relaxing factor, its use and its advantages and disadvantages.
Abstract This paper explains that nitric oxide is an endothelium-derived relaxing factor, a neurotransmitter and an euro modulator present in the central and peripheral nervous systems. When generated in surplus, a likely toxic molecule forms part of the resistance against diseases. The author points out that the primary problem involved in the detection of NO result from its short span of life and a very low rate of concentration. Nonetheless, the paper demonstrates several quantitative modes for measuring NO and indicates their limitations. The paper stresses that the endothelium performs a vital role in the determination of blood pressure; primary endothelial irregularities, in addition to irregularities secondarily influencing the endothelium, are all possible suppliers to the advances of hypertension. Many charts and graphs.
Table of Contents
Introduction
Nitric Oxide: Advantages and Disadvantages
Is Nitric Oxide the Same Substance as Endothelium Derived Relaxing Factor
Nitric Oxide's Interactions with the Vascular Endothelium
Ways Nitric Oxide is Measured and the Problems Associated with Measuring
Conclusion
From the Paper "The hydrogen peroxide has been projected to be a freely diffusible EDHF as agonist evoked relaxation in some arteries that are NO and autonomous prostanoid are inhibited by the enzyme catalyse that destroys this reactive oxygen species. Such findings have not been general and hence the role of hydrogen peroxide in EDHF responses is evoked by gap junction dependent and independent mechanisms. It is seen earlier that EDHF-type relaxations evoked by acetylcholine, ATP, substance P and cyclopiazonic acid depend on gap junctional communication. But the calcium ionophore A23187 irrespective of evoking EDHF-type relaxations was not vulnerable to gap junction inhibitors. Incubation with catalyse resulted in marked attenuation of A23187 induced EDHF-type relaxations but only inhibited reactions induced by high concentrations of acetylcholine. This indicated that EDHF-type relaxations induced A23187 may be arbitrated by hydrogen peroxide and would not associate with gap junctions."
Abstract This paper examines the origin of the 'F' word, how the word came to be and how it is used today in American culture. The paper discusses that there are various legends and claims regarding the origin of the 'F' word and while some claim that the word was derived from the language of the Vikings, others claim that the word was derived from an acronym. This paper explores that various sources that make claim to possess knowledge of the origin of the 'F' word.
Outline:
Objective
introduction
Urban Legends And Myths Of The 'F' Word
The French Claim To Origin Of The 'F' Word
Random House Historical Dictionary Of American Slang
Indo-European Root 'Peuk'
North-Sea Germanic Areal Form
In Depth-Analysis
Summary & Conclusion
From the Paper "Because of this, English archers would taunt the French by raising their middle fingers and exclaiming that they could still 'pluck yew' hence the four-letter word." (Wilton, 2004) According to Wilton, this specific legend was a pun and Wilton states: "It is doubtful that whoever came up with this howler meant for it to be taken seriously. But this joke has gained urban legend status thanks to the internet." Wilton relates that four letter words, such as the 'F' word."
Abstract A paper which explores philosopher Immanuel Kant's theory which is expressed in his book "Groundwork of the Metaphysics of Morals - Deriving the Moral Law" where he guarantees a surefire formula we should apply for every decision we make. What is absolutely right and wrong (morals) by Kant's definition are exclusively an idea from pure reason and not from anything we experience in the natural world. Therefore a pure, universal moral law is "indispensably necessary" to allow for morality to live up to its name without any influence from our fallible empirical inclinations. His theory is examined by answering several questions pertaining to modern life.
From the Paper "This supreme principle of morality is called the Categorical Imperative. Categorical means it is universal, and imperative means that it is absolute and must be done for its own sake. It is used by the will to determine the right action for every situation. The will is important, because the good will is the only thing without qualification that can be good. If it is the only true good thing, then it must be the basis for all good actions. Kant states that we have a duty to follow what we determine is right by reasoning. So the next piece of Kant's philosophy is to explain how to go about this reasoning using the Categorical Imperative."
