11.2 Derivatives

Question 1

Types

Answer 1

• Futures and Forwards
• Options
• Swaps
• Warrants

Question 2

Users of derivatives

Answer 2

• Investors: pension funds, general insurers, etc
• Producers and consumers (oil and commodities)
• Banks (counterparties)

Question 3

Uses of derivatives

Answer 3

• Speculating
• Portfolio management
• Hedging
• Arbitrage

Question 4

Advantages of warrants as a benefit to bonds

Answer 4

• Appeals to a different sector of the market&raquo_space;> can raise funds more easily
• Investors are willing to pay more for the added option: higher price = lower GRY = company can raise funds more cheaply

Question 5

Futures vs Forwards

Answer 5

• Futures are standardised and exchange traded
• Futures more marketable
• Forwards can be customised