Foreign Exchange Theory. Session 2 Introduction to Derivatives II. Derivatives an Evil?. Creates excessive volatility in the underlying market. Derivatives are too risky. Many firms face large losses as a result of derivatives. Corporate Losses (examples).
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Introducing derivatives increase volatility of the underlying asset?
Bacha and Fremault Vila (1994)
Examine whether the introduction of the Nikkei index futures
increase volatility of the underlying spot index. The Nikkei index
futures are traded on SIMEX, OSE, CME. They find little
evidence of increased volatility after introduction of futures.
N. Takezawa (ICU)
Looks at the introduction of options on individual stockon an organized
exchange [CBOE and American Option Exchange]. Examines its impact on the underlying stock price.
Specifically, looks at the cumulative residuals (abnormal returns). Finds
increase in excess returns around listing date. Is this evidence for improved welfare?
Risk?
Beta from the market model is used to measure systematic risk. Beta is not
statistically different between the pre and post listing periods.
Volatility?
Volatility as measured by variance (stand. dev. returns) decreases.
N. Takezawa (ICU)
Nissay Research (1996) and WhartonCIBC Wood Gundy (1996)
N. Takezawa (ICU)
Nonfinancial Firms: Derivatives Usage
利用状況
41％ 利用している、７％ 以前利用した事がある、
５２％ 利用した事はない
規模別
小型企業 １８％、中型企業 ３７％、大型企業 55％、
超大型企業 86％
デリバティブ利用のタイプ別
先渡契約 79％、スワップ 59％、オプション 29％、先物 １２％
原資産
為替関連 87％、金利関連 60％
ニッセイ基礎研究所（１９９６）
N. Takezawa (ICU)
N. Takezawa (ICU)
Forward Rate
(rate set today)
（先渡契約）
Use rate
set one
month earlier
Spot rate
Today
One Month
Later
The forward rate (one month) is set today, for example at
107 yen/dollar. This means you can use the 107 yen/dollar rate
one month later to buy/sell yen. Whereas the spot rate is the rate
you buy/sell yen today (+2 business days).
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Forward Contract: an agreement to buy or sell an asset for
prespecified price at a given time in the future.
100yen/$
110yen/$
120yen/$
110 yen/$
?
1 Month Later
Today
You are based in Japan and export goods to the market in
US dollars. You wish to convert your dollar earnings back
into Japanese yen. Payment to you in dollars is made one
month later (agreement made today price is $1 per unit).
N. Takezawa (ICU)
Dollar holdings in terms of yen
Gain/Loss
spot position
+
Gain relative to
110yen/$
0
spot rate
in 1 month
110

forward: contract
to sell 1$ at 110yen/$
Spot position cancels with forward position
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F(t,T) is the forward rate (yen/$) at time t which matures
at time T, S(t) is the spot exchange rate (yen/$) at time t,
and I is the the Eurorate (interest rate). The interest rate
is adjusted by time to maturity Tt based on a 360 day year.
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