Sales Representatives Manual 2020

Sales Representatives Manual Volume 4 2020 Volume 4 Table of Contents Chapter 1 Overview of Derivatives Transactions ………… 1 Chapter 2 Products of Derivatives Transactions ……………99 Derivatives Transactions and Chapter 3 Articles of Association and ……………… 165 Various Rules of the Association Exercise (Class-1 Examination) ……………………………………… 173 Chapter 1 Overview of Derivatives Transactions Introduction ∙∙∙∙∙∙∙∙ 3 Section 1. Fundamentals of Derivatives Transactions ∙∙∙∙∙∙∙∙ 10 1.1 What Are Derivatives Transactions? ∙∙∙∙∙∙∙∙ 10 Section 2. Futures Transactions ∙∙∙∙∙∙∙∙ 10 2.1 What Are Futures Transactions? ∙∙∙∙∙∙∙∙ 10 2.2 Futures Price Formation ∙∙∙∙∙∙∙∙ 14 2.3 How to Use Futures Transactions ∙∙∙∙∙∙∙∙ 17 Section 3. Forward Transactions ∙∙∙∙∙∙∙∙ 24 3.1 What Are Forward Transactions? ∙∙∙∙∙∙∙∙ 24 Section 4. Option Transactions ∙∙∙∙∙∙∙∙ 25 4.1 What Are Options Transactions? ∙∙∙∙∙∙∙∙ 25 4.2 Options’ Price Formation ∙∙∙∙∙∙∙∙ 32 4.3 Characteristics of Options Premiums ∙∙∙∙∙∙∙∙ 36 4.4 Sensitivity of Premiums to the Respective Factors ∙∙∙∙∙∙∙∙ 38 4.5 How to Use Options ∙∙∙∙∙∙∙∙ 46 4.6 Option Pricing Theory ∙∙∙∙∙∙∙∙ 57 Section 5. Swap Transactions ∙∙∙∙∙∙∙∙ 63 5.1 What Are Swap Transactions? ∙∙∙∙∙∙∙∙ 63 Section 6. Risks in Derivatives Transactions ∙∙∙∙∙∙∙∙ 72 Conclusion ∙∙∙∙∙∙∙∙ 82 Introduction Introduction 1. History of Derivatives Transactions Chapter 1 The term “derivatives” is used for financial instruments that “derive” from financial assets, meaning those that have securities such as shares or bonds as their underlying assets or financial transactions that use a reference indicator such as interest rates or exchange rates. Today the term “derivative” is used widely throughout society and not just on the financial markets. Although there has been criticism that they amplify financial risks and have a harmful impact on the Chapter 2 economy, derivatives are an indispensable requirement in supporting finance in the present age, and have become accepted as the leading edge of financial innovation. The derivatives market grew steadily until recent years, presenting the question of why there was such a demand for derivatives trades. One reason is that derivatives pass on cash flow, but Chapter 3 also facilitate the transfer of risk by restructuring cash flow. This transfer of risks not only consists of hedging risks for traditional assets with futures, but also is more diversified and finely-tuned, extending across various assets and risk factors as well as periods of time. Corporations as well as financial institutions and investors encounter many different types of risks, and have a strong desire to either hedge these risks or to take these risks by investing in them. It is of course true that using derivatives to shift risk will not reduce the risk in the market as a whole since this is a zero sum game, and there are also opinions that they present an unavoidable risk of excessive supply of money to the financial markets since many of the derivatives are created without being backed by any actuals. Nevertheless, having access to derivative transactions is an important option in management and investment decisions since being able to avoid excess risk concentration and to hedge risks effectively are critical not only to risk management but also to the improvement of capital efficiency. Derivatives have a long history, and there are even references to them in literature going back to Greek civilization. Futures transactions first started with agricultural products, metals, and other general commodities. Today, however, extensive futures trading also takes place in a variety of financial instruments, including foreign currencies, bonds, interest rates on deposits and share price indices. The term “financial futures” is used to distinguish futures in these financial instruments from futures in general commodities such as agricultural products and metals. This chapter will use the term “financial futures” to refer to the trading of all financial futures products including foreign currency, bonds, interest rates on deposits and share price indices, except where a distinction is particularly required. The trading of financial futures started in 1972 when the Chicago Mercantile Exchange (CME) launched the International Monetary Market (IMM) on its premises and began trading foreign currency futures. This provided an opening in the late 1970s and early 1980s for the development of futures trading on various other financial instruments in the United States, including bonds, interest rates and share price indices. In particular, the first half of the 1980s saw Sales Representatives Manual 2020 ● Volume 4 3 Chapter 1. Overview of Derivatives Transactions a steady stream of new and remarkably diverse financial futures products. Up to the mid-1980s, we also saw the introduction of financial futures trading in other countries such as the United Kingdom, Canada, Holland, Australia and Singapore. During this decade, financial futures trading began to spread across the globe. Financial futures trading has become a major force in the overall futures market. Since 1985, in the United States, the value of financial futures trading has surpassed that of commodity futures. In 1985, 10-year JGBs (JGBs) became the first financial futures product to be traded in Japan. Trading in this instrument grew far more rapidly than most people expected, and within a year after trading started, futures eclipsed the trading value of the actual bond itself. In 1987, JGB futures trading ranked first in the world in terms of sales volume, drawing the attention of futures markets throughout the world. In 1987, trading in share futures began with the introduction by a securities exchange of the Stock Futures 50, in which fifty brands of shares were packaged together to create a futures product. Trading in share index futures started in 1988, after an amendment to the Securities and Exchange Law. Currency and interest-rate futures were introduced in 1989 with the establishment of the financial futures exchange. In September 2007, the Financial Futures and Exchange Law was abolished and the Financial Instruments and Exchange Act (hereinafter referred to as the “FIEA”) came into force amending the Securities and Exchange Law. Under the new Act, “securities exchanges” which deal with securities-related transactions and “financial futures exchanges” which handle only financial futures transactions form one category of “financial instruments exchanges” which handle all kinds of financial instruments. Subsequently, more steps have been taken to improve the viability of financial futures trading, including improvements in price-discovery methods and the margin system. Since 2000, alliances between Japan’s exchanges and overseas exchanges have accelerated, promoting diversification of products. In January 2013, the Tokyo Stock Exchange, Inc., and the Osaka Securities Exchange, Co., Ltd. integrated their business operations and established Japan Exchange Group, Inc., with the objective of gaining greater advantage in global competition among exchanges. As a result, since March 24, 2014, financial futures and options transactions that had previously been handled by both exchanges have been handled only on the Osaka Exchange, Inc. (formally the Osaka Securities Exchange, Co., Ltd.; the company name changed as of the same day). According to some historians, options transactions are said to have been born when a good olive crop was forecast in ancient Greece and people would buy the right (option) to use the olive presses. In the modern era, options were traded on Dutch tulip bulbs at the beginning of the 17th century. Although an options market appeared in England in the 1690s, it became illegal under the Bernard Law of the Walpole Cabinet in 1733. Despite this, however, option transactions remained popular, and the Bernard Law was abolished in 1860. In the United States, option transactions began to be traded in the latter half of the 18th 4 Sales Representatives Manual 2020 ● Volume 4 Introduction century, and the modern era of option transactions began after the Civil War. In the 1920s, the options market gained popularity in the over-the-counter market as a means of speculation. However, the options provided to salesmen as a means of promoting sales became a problem because of their use in market manipulation. Chapter 1 On April 26, 1973, trading of call options on 16 individual shares began on the Chicago Board Options Exchange (CBOE). In 1977, trading of put options also began. However, because there was a lot of unfair activity involved in sales and trading, the Securities and Exchange Commission (SEC) placed a moratorium on the operations, prohibiting new products and an increase in underlying issues. Chapter 2 This measure was abolished in March of 1980, allowing option transactions to become the flourishing activity that it is today. At this time, financial deregulation under the Reagan Administration and the subsequent stimulus it supplied to the financial markets caused option transactions to expand and then spurred Chapter 3 the development of new options products. The repercussions were felt in major stock exchanges throughout the world, giving rise to options on futures trading in Europe and in Japan. Derivatives markets experienced tremendous growth as financial markets became more globalized and borderless at an increasing speed in the 21st century, and this has led to astounding progress in product development and trading techniques. Most of these have involved negotiated

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