Commercial banks are involved in futures, options, and other derivative instruments in two important ways. First, they design or price these derivative instruments for their clients. Second, they also use derivative instruments in managing interest rate and currency risks specifically and asset-liabilities in general. Introduction of the international dimension to bank management transforms various risk facets and their management. For instance, domestic interest rate risk of a bank may be mitigated or magnified in the presence of the currency risk it faces. Further, the economics of benefit-cost analysis regarding risk management on behalf of the bank’s clients as well as on its own account significantly changes in the presence of a bewildering array of derivative instruments available on international dimension (swaps, belong to this category). Thus, an understanding of these instruments is vital for managing operations of multinational banks.
Primarily on currency and interest rates related derivative instruments because they are widely used by multinational banks. First, differences and similarities between forward and futures contracts are discussed. Then, salient characteristics of both currency and interest rate futures contracts are described. Options and options on futures are finally explained. One major purpose is highlight linkages among futures, options, and their underlying assets. This discussion serves as a foundation for discussion of some intricate derivative instruments such as interest rate and currency swaps, where these complex instruments will be shown as a combination of the basic (option and futures) instruments.
Primarily on currency and interest rates related derivative instruments because they are widely used by multinational banks. First, differences and similarities between forward and futures contracts are discussed. Then, salient characteristics of both currency and interest rate futures contracts are described. Options and options on futures are finally explained. One major purpose is highlight linkages among futures, options, and their underlying assets. This discussion serves as a foundation for discussion of some intricate derivative instruments such as interest rate and currency swaps, where these complex instruments will be shown as a combination of the basic (option and futures) instruments.