Part 5: The derivative

Part 5: The derivative

I. Concept Derivatives are instruments issued on the basis of the existing tools such as stocks and bonds to many different goals such as risk diversification, protecting profits or generate profits. II. The types of derivative instruments 1. The right choice ...

I. NiemCong term derivative instruments are issued on the basis of the existing tools such as stocks and bonds to many different goals such as risk diversification, protecting profits or benefits made nhuan.II. The types of derivatives sinh1. The right choice (Option)

a. The concept: The right choice is a tool that allows its holder to buy (for a call option) or sell (for a put option) a specified quantity of goods at a certain price, and the a certain period of time.

The goods can be the basis of this stock, stock index, bond, bond index, commodity, currency or futures contracts lai.b. These elements constitute a right to choose

- Names of facilities and goods bought at the right volume.

- Type of power (or buy put options).

- The duration of the right.

- The exercise price of the right.

c. The price related to an option are:

- The current market price of the commodity basis.

- Cost of goods made in the right base.

- Price option.

For a call option, if the strike price is lower than the current price of the underlying, the right which is called the money (in the money), that is, who can benefit from the right to the exercise of . If the exercise price equal to the market price, the right is on break (at the money), and if higher, called're losing money (out of money). For the put option, on the contrary, the exercise would be beneficial if the exercise price is higher than the market price of goods facilities and will lose money if the exercise price lower than the market price of goods basis.

The value that the option holder will receive by implementing the right is called intrinsic value (intrinsic value). If in a state the right to lose money, the intrinsic value of 0. The market value of a common authority at least equal to the intrinsic value. Price right is called the residual, the difference between the selling price to the intrinsic value rights (in case the money is right) is called the residual value over time. In other words, when it:

Time value of an option to purchase the right price = - (market price - exercise price).

Example 1: The price of an option to buy XYZ is 400,000, the market price of XYZ is 42,000 VND. Rights holder can seize 200,000 VND immediately by exercise, ie buy 100 shares (fixed price is right) with 4,000,000 total costs, as well as follow the price is right 40,000 dong per share, then sold at market value, earned 4,200,000 e. Intrinsic value of the rights is 200,000 VND.

The extra value = price right time - intrinsic value = 400,000 VND - 200,000 VND 200,000 VND =

The buyer is willing to pay the extra for the option because they get more benefit from a choice in chon.d. application of the option:

Right choice allows investors to obtain% rate on investment income highest.

Example 2: Assume the current market shares of XYZ is 42,000 VND / share, and you anticipate again after half a year, the price of XYZ stock will increase, up to 50,000 VND. Assuming the option-related transactions XYZ stock is listed, you can buy an option to buy XYZ stock for $ 40,000 VND / share.

Within 6 months of XYZ stock price rose to 50,000 VND / share. You can force the seller to deliver 100 shares XYZ for you to 40,000 VND / share, then sell them on the market for $ 50,000.

So you have created a substantial profit. Actually you have made a profit on investments 60,000 40,000, so the yield is 150%, over a period of 6 months.

The right choice is used to protect profits

Example 3: The XYZ's market price is 44,000 dong, who owns 100 shares XYZ XYZ sells a call option is the right cost 44,000 VND 400,000.

If the market price of XYZ dropped to 40,000, the seller will be protected from losses due to the 40,000 received from the sale of the option. If XYZ continues to decline, then the seller will lose money. Thus, revenues from the sale of 40,000 the option to create a protection tool for the depreciable status.

If the price of XYZ 6 months to remain the same, will not be done right. 40,000 additional revenues as a supplemental income to total investment.

2. Preemptive rights (right)

Preemptive rights as a buyer has the right to choose a very short time, sometimes only a few weeks. This power is released when the companies raise capital by issuing additional common stock. Rights allow shareholders to buy new shares were issued at a price fixed in a determined period of time.

This type of power is usually released in waves, each outstanding share shall be accompanied by a right. Number of rights required to purchase one new share is prescribed depending on the new issue.

Stock price is usually indicated on the right lower current price of the stock. Price of power equal to the difference between the current market value of outstanding shares and purchase price of the new shares on rights, divided by the number of rights required to purchase one new share.

For example, the right to sell shares (exercise price) is 800,000 dong / share, but the market value is 1,000,000, if the right to purchase one of 10 new shares, the cost of which shall be determined by the of Vr = P0 - Pn / r

Where: Vr is the value of a right, P0 is the market value of outstanding shares, Pn is the new stock price performance and r is the number of rights required to purchase one new share.

So, here is the right price Vr = (1000000-800000) / 10 = 20,000.

If you do not want to exercise, shareholders have the right to sell on the market in the right time has not expired. Prices can go right down the offer period, depending on the price fluctuations of the stock market.

3. Warrants (Warrants)

Stock purchase rights are rights that allows a defined number of shares of a stock, with a fixed price, within a certain period. This power is released when conducting corporate reorganization, or if the company wants to encourage potential investors to buy these bonds or preferred shares, but less favorable conditions. To accept these conditions, investors may be an option for the appreciation possible of common stock.

Features:

Unlike preemptive rights, warrants have a term of longer, because the company has released the tool base released simultaneously with the tool base. Other than the option (option), the warrant is made, it creates a cash flow to the company and increase the amount of outstanding shares in the market.We rights can be traded separately from bonds or shares which it comes.

The conditions specified in the warrant certificate form: the number of shares to be purchased under a warrant (thuongla 1:1) the exercise price per share, at the time the warrants were issued, the price of which always higher than the market price of shares basis, and it can be fixed prices, which can be increased periodically, and the right time, the majority of cases is 5 to 10 years.

4.Hop futures

Futures contract is an agreement in which a buyer and a seller agreed to undertake a transaction volume of goods to determine, at a specified time in the future at a fixed price on today. Goods here can be any commodity which, from agricultural, currencies, until the stock.

Under this contract, the only two parties involved in the signing and price agreed upon by the two parties together, based on the estimate of human nature. Commodity Prices on the spot market at the time of delivery of goods may change, up or down compared to the price in the contract signed. Then, either the buyer and seller will damage committed by a lower price (the seller) or higher (the buyer) at the market price.

Thus, by participating in a futures contract, both parties limit potential risks as well as limiting their profit potential. Since there are only two parties to the contract, so that each side is dependent only on the other side of the performance contract. When there is a change in the market price for immediate delivery, payment risk will increase when either party to perform the contract. Also, because the price set personal and subjective so it may not be exact.

5. LaiHop contracts futures, thanks to its flexible nature, overcomes the drawbacks of the contract term, and is often seen as a better way to hedge business risk.

The fundamental difference of futures contracts over the contract term is: 1. Listed on exchanges. A futures contract transactions generally handled on an Exchange. This point allows prices to be more reasonable shape, sold by the buyer to provide adequate information and publicity.

2. Elimination of credit risk. In trading futures contracts listed on exchanges, both the seller and buyer will never know about their trading partners. Clearing Company will serve as an intermediary in all transactions. Seller sold to clearing firms, and buyers also purchased through clearing firms. If either party fails to perform the contract shall not affect the other.

3.Tieu standardization. The contracts can be drawn up with any commodity, quantity, quality, delivery any time, by mutual agreement between the seller, buyer. However, the futures contracts listed on exchanges delivery requires a specific quantity of a particular product meets the minimum quality standards, according to a pre-determined time limit.

4. Adjust the assessed market value (Marking to market). During the contract period, the losses, only interest is paid when the contract is due. With a futures contract, any food that is also good delivery date. Specifically, if the prices of goods fluctuate basis other than the agreed price (strike price contracts), the party aggrieved by this change to pay for the benefit of the price change. In fact, because neither party knew of his partners in the transaction, so the loser will pay for clearing company, and the company will pay for the winners.

Part 1: Summary of Stock

Part 2: Introduction to stocks

Part 3: Introduction to Bonds

Part 4: Stock may convert

Part 5: Derivatives

Part 6: Primary Market

Part 7: First Issue of securities to the public (IPO)

Section 8: Process initial issuance of securities to the public

Section 9: Underwriting