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Overview of Key Derivative Products

This document discusses various emerging derivatives products including currency derivatives, credit linked notes, credit default swaps, structured finance, securitization, CDOs, synthetic CDOs, ABS, weather derivatives, bitcoin futures, diamond derivatives, and inflation indexed derivatives. Specifically, it provides details on currency derivatives which allow buying or selling of currency pairs at a future date, credit default swaps which transfer credit risk from one party to another, and credit linked notes which combine a credit default swap with a note to create a security with bond and derivative characteristics.

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23 views2 pages

Overview of Key Derivative Products

This document discusses various emerging derivatives products including currency derivatives, credit linked notes, credit default swaps, structured finance, securitization, CDOs, synthetic CDOs, ABS, weather derivatives, bitcoin futures, diamond derivatives, and inflation indexed derivatives. Specifically, it provides details on currency derivatives which allow buying or selling of currency pairs at a future date, credit default swaps which transfer credit risk from one party to another, and credit linked notes which combine a credit default swap with a note to create a security with bond and derivative characteristics.

Uploaded by

Leo the Bulldog
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Emerging derivatives products

➔ Currency Derivatives
➔ Credit Linked Notes
➔ Credit Default Swaps
➔ Structured Finance
➔ Securitization
➔ CDO
➔ Synthetic CDOs
➔ ABS
➔ Weather derivatives
➔ Bitcoin futures
➔ diamond derivatives
➔ inflation indexed derivatives

CURRENCY DERIVATIVES
● Currency Derivatives are futures and options contract where you can buy or sell specific
quantities of a particular currency pair at a pre-determined future date.
● Currency Derivative Trading is similar to Stock Futures and Options trading. However,
the underlying asset are currency pairs (such as USDINR or EURINR) instead of Stocks.
Currency Options and Currency Futures trading is done in the Foreign Exchange markets.
● Currency Derivatives Trading is suitable for those interested in reducing their foreign
exchange rate risk.
● A currency future, also known as FX future, is a futures contract to exchange one
currency for another at a specified date in the future at a price (exchange rate) that is
fixed on the purchase date.
● Leading stock exchanges of India offer futures trading contracts in different foreign
currencies. In India, one can use such derivative contracts to hedge against 4 currencies
i.e. US Dollar, Euro, U.K. Pound and Yen so as to manage any risk against foreign
currency exchange rate volatility.

 
CREDIT DEFAULT SWAPS
● CDS contracts can mitigate risks in bond investing by transferring a given risk from one
party to another without transferring the underlying bond or other credit asset.
● In a CDS, one party “sells” risk and the counterparty “buys” that risk. The “seller” of
credit risk – who also tends to own the underlying credit asset – pays a periodic fee to the
risk “buyer.” In return, the risk “buyer” agrees to pay the “seller” a set amount if there is
a default (technically, a credit event).
● CDS are designed to cover many risks, including: defaults, bankruptcies and credit rating
downgrades.
● In addition to hedging credit risk, the potential
benefits of CDS include:

➢ Requiring only a limited cash outlay


(which is significantly less than for
cash bonds)
➢ Access to maturity exposures not
available in the cash market
➢ Access to credit risk with limited
interest rate risk
➢ Investments in foreign credits
without currency risk
➢ At times, more liquidity than
investing in the underlying cash
bonds

CREDIT LINKED NOTE

● A CLN combines a credit default swap (CDS) and a medium term note to deliver a
security having both bond and derivative characteristics.
● A credit-linked note (CLN) is a security with an embedded credit default swap permitting
the issuer to shift specific credit risk to credit investors.
● Credit-linked notes are created through a special purpose vehicle (SPV), or trust, which is
collateralized with high rated securities.

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