商业银行管理Chap008课件.ppt

1、Chapter EightRisk Management:Financial Futures,Options,Swaps,and Other Hedging ToolsKey Topics The Use of Derivatives Financial Futures Contracts:Purpose and Mechanics Short and Long Hedges Interest-Rate Options:Types of Contracts and Mechanics Interest-Rate Swaps Regulations and Accounting Rules Ca

2、ps,Floors,and CollarsIntroduction The asset-liability management tools we explore here are useful across a broad range of financial-service providers sensitive to the risk of changes in market interest rates Many of the risk management tools in this chapter are not only used by financial firms to co

3、ver their own interest rate risk,but are also sold to customers who need risk protection and generate fee income for the providers Most of the financial instruments in this chapter are derivatives They derive their value from the value and terms of underlying instrumentsUses of Derivative Contracts

4、Among FDIC-Insured Banks Due to their high exposure to various forms of risk,banks and their principal competitors are among the heaviest users of derivative contracts These risk-hedging instruments allow a financial firm to protect its balance sheet and/or income and expense statement in case inter

5、est rates,currency prices,or other financial variables move against the hedger Approximately 15 percent of all banks operating in the United States reportedly employ the use of derivatives to subdue risk in its various forms Today the bulk of trading in derivatives is centered in the very largest ba

6、nks worldwide Interest-rate risk is by far the most common target for derivatives,with foreign exchange(currency)risk running a distant second The leading type of risk-hedging contracts are swaps,followed by financial futures and optionsEXHIBIT 8-1 Types of Derivative Contracts Used by Depository In

7、stitutions to Manage Different Types of Risk Exposure,2010Financial Futures Contracts:Promises of Future Security Trades at a Preset Price In Chapter 7,we explored the nature of gaps between assets and liabilities that are exposed to interest rate risk The preceding chapter developed one other measu

8、re of the difference between risk-exposed assets and liabilities the leverage-adjusted duration gapFinancial Futures Contracts:Promises of Future Security Trades at a Preset Price(continued)A financial futures contract is an agreement reached today between a buyer and a seller that calls for deliver

9、y of a particular security in exchange for cash at some future date Financial futures trade in futures markets and are usually accounted for as off-balance-sheet items on the financial statements of financial-service firms Sellers of financial assets remove the assets from their balance sheet and ac

10、count for the losses or gains on their income statements Buyers of financial assets add the item purchased to their balance sheet In cash markets,buyers and sellers exchange the financial asset for cash at the time the price is set In futures markets buyers and sellers exchange a contract calling fo

11、r delivery of the underlying financial asset at a specified date in the futureFinancial Futures Contracts:Promises of Future Security Trades at a Preset Price(continued)When the contract is created,neither buyer nor seller is making a purchase or sale at that point in time,only an agreement for the

12、future When an investor buys or sells futures contracts at a designated price,it must deposit an initial margin The initial margin is the investors equity in the position when he or she buys(or sells)the contract Each traders account is marked-to-market When a traders equity position falls below the

13、 maintenance margin(the minimum specified by the exchange)the trader must deposit additional funds to the equity account to maintain his or her position,or the futures position is closed out within 24 hours The mark-to-market process takes place at the end of each trading dayFinancial Futures Contra

14、cts:Promises of Future Security Trades at a Preset Price(continued)Buyers of futures contracts A buyer of a futures contract is said to be long futures Agrees to pay the underlying futures price or take delivery of the underlying asset Buyers gain when futures prices rise and lose when futures price

15、s fall Sellers of futures contracts A seller of a futures contract is said to be short futures Agrees to receive the underlying futures price or to deliver the underlying asset Sellers gain when futures prices fall and lose when futures prices riseFinancial Futures Contracts:Promises of Future Secur

16、ity Trades at a Preset Price(continued)The financial futures markets are designed to shift the risk of interest-rate fluctuations from risk-averse investors,such as banks and insurance companies,to speculators willing to accept and possibly profit from such risks Futures contracts are traded on orga

17、nized exchanges For example,the Chicago Mercantile Exchange or the London Financial Futures Exchange On the exchange floor,floor brokers execute orders received from the public to buy or sell these contacts at the best prices availableFinancial Futures Contracts:Promises of Future Security Trades at

18、 a Preset Price(continued)Futures contracts are also traded over the counter(OTC)Often less costly for traders These are most often called forward contracts Forward contracts Generally more risky counterparty risk and liquidity risk Terms are negotiated between parties Do not necessarily involve sta

19、ndardized assets Require no cash exchange until expiration No marking to marketFinancial Futures Contracts:Promises of Future Security Trades at a Preset Price(continued)Most common financial futures contracts U.S.Treasury Bond Futures Contracts Three-Month Eurodollar Time Deposit Futures Contract 3

20、0-Day Federal Funds Futures Contracts One Month LIBOR Futures Contracts EXHIBIT 82 Sample Market Prices for Interest-Rate Futures in Recent YearsFinancial Futures Contracts:Promises of Future Security Trades at a Preset Price(continued)Short Futures Hedge Process Today contract is sold through an ex

21、change Sometime in the future contract is purchased through the same exchange Results the two contracts are cancelled out by the futures clearinghouse Gain or loss is the difference in the price purchased for(at the end)and the price sold for(at the beginning)Financial Futures Contracts:Promises of

22、Future Security Trades at a Preset Price(continued)Long Futures Hedge Process Today contract is purchased through an exchange Sometime in the future contract is sold through the same exchange Results the two contracts are cancelled by the clearinghouse Gain or loss is the difference in the purchase

23、price(at the beginning)and the price sold for(at the end)Financial Futures Contracts:Promises of Future Security Trades at a Preset Price(continued)The three most typical interest-rate hedging problems financial firms face are1.Protecting the value of securities and fixed-rate loans from losses due

24、to rising interest rates2.Avoiding a rise in borrowing costs3.Avoiding a fall in the interest returns expected from loans and security holdings Where the financial institution faces a positive interest-sensitive gap,it can protect against loss due to falling interest rates by covering the gap with a

25、 long hedge If the institution is confronted with a negative interest-sensitive gap,it can avoid unacceptable losses from rising market interest rates by covering with a short hedgeFinancial Futures Contracts:Promises of Future Security Trades at a Preset Price(continued)Basis Risk The basis is the

26、cash price of an asset minus the corresponding futures price for the same asset at a point in time For financial futures,the basis can be calculated as the futures rate minus the spot rate It may be positive or negative,depending on whether futures rates are above or below spot rates May swing widel

27、y in value far in advance of contract expirationFinancial Futures Contracts:Promises of Future Security Trades at a Preset Price(continued)Basis Risk with a Short Hedge You are concerned about the interest-rate risk exposure for bonds in a financial institutions securities portfolio You fear increas

28、ing interest rates that would decrease the value of those bonds You have a long position in the cash market To hedge this possible increase in market interest rates,you could take a short position in the futures marketFinancial Futures Contracts:Promises of Future Security Trades at a Preset Price(c

29、ontinued)Basis Risk with a Short HedgeFinancial Futures Contracts:Promises of Future Security Trades at a Preset Price(continued)Basis Risk with a Long Hedge If you have concerns about declining interest rates,you could create a long hedge To hedge the decrease in interest rates,you could take a lon

30、g position in the futures marketFinancial Futures Contracts:Promises of Future Security Trades at a Preset Price(continued)The real risk the user faces from hedging with futures stems from the movement in basis that may occur over the life of a futures contract because cash and futures prices are no

31、t perfectly synchronized with each other The sensitivity of the market price of a financial futures contract depends,in part,upon the duration of the security to be delivered under the futures contractFinancial Futures Contracts:Promises of Future Security Trades at a Preset Price(continued)If we re

32、write this equation slightly we get an expression for the gain or loss from the use of financial futuresEXHIBIT 83 Trade-Off Diagrams for Financial Futures ContractsFinancial Futures Contracts:Promises of Future Security Trades at a Preset Price(continued)How many futures contracts does a financial

33、firm need to cover a given size risk exposure?The objective is to offset the loss in net worth due to changes in market interest rates with gains from trades in the futures marketFinancial Futures Contracts:Promises of Future Security Trades at a Preset Price(continued)If we set the change in net wo

34、rth equal to the change in the futures position value,we can solve for the number of futures contracts needed to fully hedge a financial firms overall interest-rate risk exposure and protect its net worthInterest-Rate Options The interest-rate option grants a holder of securities the right to either

35、1.Place(put)those instruments with another investor at a prespecified exercise price before the option expires or2.Take delivery of securities(call)from another investor at a prespecified price before the options expiration date In the put option,the option writer must stand ready to accept delivery

36、 of securities from the option buyer if the latter requests In the call option,the option writer must stand ready to deliver securities to the option buyer upon request The fee that the buyer must pay for the privilege of being able to put securities to or call securities away from the option writer

37、 is known as the option premiumInterest-Rate Options(continued)For standardized exchange-traded interest-rate options,the most activity occurs using options on futures,referred to as the futures options market Most common option contracts used by banks U.S.Treasury Bond Futures Options Grant the opt

38、ions buyer the right to a short position(put)or a long position(call)involving one T-bond futures contract for each option Eurodollar Futures Option Give the buyer the right to deliver(put)or accept delivery(call)of one Eurodollar deposit futures contract for every option exercised Exchange-traded f

39、utures options are generally set to expire in March,June,September,or December to conform to most futures contractsEXHIBIT 84 Futures Options Sample PricesInterest-Rate Options(continued)Most options today are used by money center banks They appear to be directed at two principal uses1.Protecting a

40、security portfolio through the use of put options to insulate against falling security prices(rising interest rates)There is no delivery obligation under an option contract so the user can benefit from keeping his or her securities if interest rates fall and security prices rise2.Hedging against pos

41、itive or negative gaps between interest-sensitive assets and interest-sensitive liabilities For example,put options can be used to offset losses from a negative gap when interest rates rise,while call options can be used to offset a positive gap when interest rates fallEXHIBIT 85 Payoff Diagrams for

42、 Put and Call Options Purchased by a Financial InstitutionEXHIBIT 86 Payoff Diagrams for Put and Call Options Written by a Financial FirmRegulations and Accounting Rules for Bank Futures and Options Trading Regulators expect a financial firms board of directors to provide oversight while senior mana

43、gement is responsible for the development of an appropriate risk-management system The risk-management system is to be comprised of1.Policies and procedures to control financial risk taking2.Risk measurement and reporting systems3.Independent oversight and control processes The OCC requires the bank

44、s it supervises to measure and set limits with regards to nine different aspects of risk associated with derivatives These risks are strategic risk,reputation risk,price risk,interest rate risk,liquidity risk,foreign exchange risk,credit risk,transaction risk,and compliance riskRegulations and Accou

45、nting Rules for Bank Futures and Options Trading(continued)In 1998,the Financial Accounting Standards Board(FASB)introduced Statement 133(FAS 133)“Accounting for Derivative Instruments and Hedging Activities”FAS 133 requires that all derivatives be recorded on the balance sheet as assets or liabilit

46、ies at their fair value With regard to interest rate risk,FAS 133 recognized two types of hedges:a fair value hedge and a cash flow hedge The objective of a fair value hedge is to offset losses due to changes in the value of an asset or liability Cash flow hedges try to reduce risk associated with f

47、uture cash flows(interest on loans or interest payments on debt)Interest-Rate Swaps An interest-rate swap is a way to change a borrowing institutions exposure to interest-rate fluctuations and achieve lower borrowing costs Swap participants can convert from fixed to floating interest rates or from f

48、loating to fixed interest rates and more closely match the maturities of their liabilities to the maturities of their assets The most popular short-term,floating rates used in interest rate swaps today include the London Interbank Offered Rate(LIBOR)on Eurodollar deposits,Treasury bill and bond rate

49、s,the prime bank rate,the Federal funds rate,and interest rates on CDs issued by depository institutionsInterest-Rate Swaps(continued)Quality Swap Borrower with lower credit rating pays fixed payments of borrower with higher credit rating Borrower with higher credit rating pays short-term floating r

50、ate payments of borrower with lower credit rating Reverse Swap A new swap agreement offsets the effects of an existing swap contract“Swaptions”Options for one or both parties to make certain changes in the agreement,take out a new option,or cancel an existing swap agreementEXHIBIT 87 The Interest-Ra