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Derivative Markets: An Introduction

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Language:  English
Forwards, futures, swaps, options, hybrids (such as swaptions and options on futures) and a category “other” (credit derivatives, weather derivatives, etc) make up the derivative markets.
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Forwards, futures, swaps, options, hybrids (such as swaptions and options on futures) and a category “other” (credit derivatives, weather derivatives, etc) make up the derivative markets. The word is drawn from “derive” and means that the derivative instrument cannot exist on its own. It is closely related to “something” and this something is usually a spot (or “cash”) market instrument called the underlying instrument. A spot deal is a deal done now (T+0 days) for settlement now. “Now” means the earliest date dictated by market convention. For example, in the money market a Treasury bill sale transacted on T+0 can be settled today (T+0) or tomorrow (T+1). In the bond market deals are done on T+0 and usually settled on T+3. In spot deals and derivative deals the price is agreed on T+0, but settlement dates are different: spot deals are settled “now” and derivative in the future (eg. T+180). Derivatives are used for hedging, speculation and investment.

  1. Context
    1. Learning outcomes
    2. Introduction
    3. The financial system in brief
    4. Ultimate lenders and borrowers
    5. Financial intermediaries
    6. Financial instruments
    7. Spot financial markets
    8. Interest rates
    9. The derivative markets
    10. Summary
    11. Bibliography
  2. Derivative markets: forwards
    1. Learning outcomes
    2. Introduction
    3. Spot market: defintion
    4. Forward market: defintion
    5. An example
    6. Forward markets
    7. Forwards in the debt markets
    8. Forwards in the share / equity market
    9. Forwards in the foreign exchange market
    10. Forwards in the commodities market
    11. Forwards on derivatives
    12. Organisational structure of forward markets
    13. Summary
    14. Bibliography
  3. Derivative markets: futures
    1. Learning outcomes
    2. Introduction
    3. Futures defined
    4. An example
    5. Futures trading price versus spot price
    6. Types of futures contracts
    7. Organisational structure of futures markets
    8. Clearing house
    9. Margining and marking to market
    10. Open interest
    11. Cash settlement versus physical settlement
    12. Payoff with futures (risk profile)
    13. Pricing of futures (fair value versus trading price)
    14. Fair value pricing of specific futures
    15. Basis
    16. Participants in the futures market
    17. Hedging with futures
    18. Basis trading
    19. Spread trading
    20. Futures market contracts
    21. Risk management by a futures exchange
    22. Economic significance of futures markets
    23. Summary
    24. Bibliography
  4. Derivative markets: swaps
    1. Learning outcomes
    2. Introduction
    3. Interest rate swaps
    4. Currency swaps
    5. Equity / share swaps
    6. Commodity swaps
    7. Listed swaps
    8. Organisational structure of swap market
    9. Summary
    10. Bibliography
  5. Derivative markets: options
    1. Learning outcomes
    2. Introduction
    3. The basics of options
    4. Intrinsic value and time value
    5. Option valuation/pricing
    6. Organisational structure of option markets
    7. Options on derivatives: futures
    8. Options on derivatives: swaps
    9. Options on debt market instruments
    10. Options on equity / share market instruments
    11. Options on foreign exchange
    12. Options on commodities
    13. Option strategies
    14. Exotic options
    15. Summary
    16. Bibliography
  6. Other derivatives
    1. Learning outcomes
    2. Introduction
    3. Securitisation
    4. Credit derivatives
    5. Weather derivatives
    6. Carbon credit derivatives
    7. Freight (or shipping) derivatives
    8. Energy derivatives
    9. Summary
    10. Bibliography
  7. Endnotes
The book simplifies some of the most technical and complicated instruments into understandable language. Thank you Dr Faure.
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About the Author

Prof. Dr AP Faure

Alexander Pierre Faure graduated from Elsenburg Agricultural College after school and went on to Stellenbosch University where he graduated with BA (Commerce), Hons BA (Economics), MA (Economics), and PhD (Economics).

He also successfully completed the Stockbroker Examination Requirements at Witwatersrand University (and is a registered Stockbroker - presently non-broking status).

He first worked for the central bank, where he was involved in compiling the monetary statistics (money stock and sources of change, and money market liquidity analysis) and later in the execution of monetary policy.

His career after central banking included private sector banking (the recipient of monetary policy), stockbroking (influenced by monetary policy) and interest rate analysis (reading monetary policy).

After his private sector experience, he became an academic and held the positions Investec Chair in Money and Banking (at Rhodes University and the University of Fort Hare) and Foord Chair in Investments (at Rhodes University).

After retirement he was appointed Professor Emeritus at Rhodes University, and remains engaged in research.  

He has published widely, including books and papers.

He also served on a number of boards of directors, holding the positions of Non-executive Director and Managing Director.