Module 3 · Derivatives

Derivative Benefits, Risks, and Uses

EN: Issuer and investor uses of derivatives — hedging, speculating, arbitrage.
VN: Issuer và investor dùng phái sinh — hedge, đầu cơ, arbitrage.

1. Issuer Uses Concept

About: Hedge FX, interest rates, commodity exposures. Lock in costs/revenues. Convert floating to fixed (or reverse) via IRS.Tóm tắt: Hedge FX, lãi suất, hàng hóa. Khóa chi phí/doanh thu. Chuyển floating-fixed qua IRS.

FX hedging Lock in exchange rates for future receivables/payables.
Rate hedging Convert floating to fixed (interest-rate swap) or vice-versa.
Commodity hedging Producers and consumers lock in prices.

2. Investor Uses Concept

About: Speculation (leveraged directional bets), hedging (reduce existing exposure), yield enhancement (sell options for premium), arbitrage, synthetic exposure.Tóm tắt: Đầu cơ, hedge, tăng yield, arbitrage, exposure tổng hợp.

Speculation Take directional view with leverage.
Hedging Reduce existing exposure.
Yield enhancement Sell options for premium, structured notes.
Arbitrage Exploit mispricings risk-free.
Synthetic exposure Achieve exposure without physical asset.

3. Risks of Derivatives Concept

About: Counterparty (OTC), leverage (small move wipes margin), liquidity (OTC unwind), operational (settle/model/basis). Manage via collateral, limits, central clearing.Tóm tắt: Counterparty, leverage, liquidity, operational. Quản lý bằng collateral, limit, clearing.

Counterparty Default risk in OTC.
Leverage Small move can wipe out margin.
Liquidity OTC contracts may be hard to unwind.
Operational Settlement, model, basis risk.

Practice problem Practice

Practice problem

A US importer expects to pay €1M in 90 days and is worried EUR will appreciate. Which derivative position eliminates this risk?

Show solution

Risk: EUR up = USD payment up.

Hedge: lock in EUR purchase price now.

Buy EUR forward / long EUR futures / buy EUR call.

Long forward on EUR (buy EUR forward at fixed rate)