Derivatives 10 AIMS: To learn about: futures, options and swaps; key vocabulary of derivatives To learn how to: clarify, summarize and paraphrase To practise: talking about the advantages and disadvantages of derivatives; clarifying and summarizing key points from a talk Lead in o Do you know what the main types of derivatives are? o What are the two main uses of derivatives? o Does the organization you work for use or trade derivatives? Reading : Derivatives Read the text and the exercises on the next page Derivatives is a collective term for financial market products whose value depends 011 (i.e is derived from) the price of another underlying asset such as a stock, a stock index (the average value of representative stocks in a given market), a currency, a commodity, etc The main derivatives are futures, options and swaps They were developed to allow companies to reduce uncertainty by guaranteeing future prices, at a reasonable cost This allows companies to plan more effectively Futures contracts are agreements to make or take delivery of specified commodities (foodstuffs, metals, etc.) or financial instruments at a fixed future date, at a price determined when the contract is made Futures contracts allow both sellers and buyers to hedge or reduce risks For example, a cocoa grower can agree a price, quantity and delivery date with a chocolate manufacturer The seller eliminates the risk that the price will drop, and the buyer the risk that it will rise The same logic led to the development of financial futures: contracts to buy and sell stocks, stock indexes, interest rates and currencies at a future date Options differ from futures in that they give the right, but not the obligation, to buy or sell an asset at a fixed price on or before a given date Buying a call option gives you the right to buy an asset; buying a put option gives you the right to sell an asset For example, if you expect the price of a stock to rise you can buy the right to buy that stock in the future at the current market price If you think the price of a stock will fall in the next few weeks or months you can buy the right to sell Unit 10: Derivative 82 it in the future at the current price If you are wrong, you not have to exercise the option to buy or sell the stocks, but you lose the price of the option This is the premium the writer or seller of the option receives from the buyer Obviously, the expectations of the writer of an option about the future value of the assets are opposite to those of the buyer, and the writer does not expect the option to be exercised Futures and options are traded by speculators hoping to make a profit from price fluctuations, as well as by companies seeking to hedge In fact, much more derivative usage is based on speculation than hedging nowadays Borrowers and lenders can also swap or exchange future interest payments A company that has borrowed money at a floating rate could protect itself from a rise in interest rates by exchanging this for a fixed interest rate loan with another company or financial institution These are interest rate swaps Companies can also undertake exchange rate swaps, exchanging funds in two different currencies At a future date the same amount of the currencies is re-exchanged at a predetermined exchange rate Over the term of the agreement, the counterparties exchange fixed or floating rate interest payments in their swapped currencies Find words and phrases in the text to complete the sentences A …………… …………… is a contract giving the possibility to sell a specified quantity of securities, foreign exchange or commodities in the future, if it is advantageous to so …………………… are raw materials such as agricultural products and metals that are traded on special exchanges ………………… are forward contracts for the purchase and sale of securities, precious metals, etc., at a fixed price A ………… …………… is a contract giving the buyer the right, but not the obligation, to buy an asset in the future If you ……………… you make transactions that are designed to reduce risk regarding a particular price, interest rate or exchange rate An …………… …………… …………… is an exchange of future payments on borrowed money according to specified terms If you …………… an option you use or implement the option, taking up the possibility to buy or sell something A…………………… anticipates future changes in a market and makes risky transactions, hoping to make a gain A …………………… is the money the writer of an option receives Unit 10: Derivative 83 Use a word or phrase from each box to make word combinations from the text You can use some words more than once Then use some of the word combinations to complete the sentences below determine eliminate exercise guarantee reduce swap interest payments options prices risks uncertainty Unit 10: Derivative 84 Companies with fixed and floating loans can choose to …………… ………… ………… Futures contracts allow you to …………… short-term …………… Hedging is the attempt to …………… …………… ; speculating is the opposite If prices move the wrong way, the buyers of ………………do not ……………….them With futures, you can ……………… ……………… several months in advance New words: − collective (adj) : tập thể, chung − underlie (v) : làm sở − representative (a/n) : đại diện − option (n) : (sự) chọn, quyền chọn (mua) − swap (n) : giao dịch trao đổi chứng khoán − swap (v) : đổi , trao chác Unit 10: Derivative 85 − uncertainty (n) : tính khơng ổn định − reasonable (adj) : hợp lý − futures (n) : giao dịch kỳ hạn, hàng giao sau − foodstuff (n) : thực phẩm − hedge (v) : mua bán lại − stock index : số giá cổ phiếu − call option : quyền chọn mua lại − put option : quyền chọn đầu tư − seek (v) : tìm kiếm − undertake (v) – undertook – undertaken : nhận làm, đảm trách − counterparty (n) : bên đối tác − predetermine (v) : định trước − raw material (n) : nguyên liệu thô − agricultural (adj) : nông nghiệp − forward contract : hợp đồng (giao hàng) dài hạn − precious (adj) : quý − anticipate (v) : đốn trước, thấy trước − advantageous (adj) : có lợi, thuận lợi Unit 10: Derivative 86 ... receives Unit 10: Derivative 83 Use a word or phrase from each box to make word combinations from the text You can use some words more than once Then use some of the word combinations to complete... eliminate exercise guarantee reduce swap interest payments options prices risks uncertainty Unit 10: Derivative 84 Companies with fixed and floating loans can choose to …………… ………… ………… Futures contracts... dịch trao đổi chứng khoán − swap (v) : đổi , trao chác Unit 10: Derivative 85 − uncertainty (n) : tính khơng ổn định − reasonable (adj) : hợp lý − futures (n) : giao dịch kỳ hạn, hàng giao sau