This paper work will focus on four types of derivatives and analyze their characteristics and their operation for the purpose of understanding the financial crisis in 2007-2008, the credit default swaps in the financial market will be defined. The link between credit default swaps and financial crisis will also be explored. The governments’ policies in order to take control over the derivatives in financial market will be mentioned. In the conclusion part, the advantages and disadvantages of derivatives will be discussed.
Contents:
1 Introduction
2 Derivatives
2.1 Definition
2.2 Usage of derivative contracts in basic strategies
3 The common types of derivatives
3.1 Futures and forward
3.1.1 Basic characteristics and differences
3.1.2 Futures and forward pricing
3.1.3 Hedging, speculating using futures and forward
3.1.3.1 Hedging
3.1.3.2 Speculating
3.2 Swaps
3.2.1 Basic characteristics
3.2.2 Four basic types of swaps
3.2.2.1 Interest rate swaps
3.2.2.2 Currency swaps
3.2.2.3 Credit swaps
3.2.2.4 Commodity swaps
3.2.3 Swaps pricing
3.3 Options
3.3.1 Basic characteristics
3.3.2 Options strategies
3.3.2.1 Call option
3.3.2.2 Put option
3.3.3 Option valuation
3.3.3.1 Intrinsic and time value
3.3.3.2 Binomial option pricing
3.3.3.3 Black-Scholes valuation
4 Credit default swaps and the financial crisis 2007 - 2008
4.1 Credit default swaps on companies
4.2 Credit default swaps on subprime mortgage-backed securities
4.3 The financial crisis 2007-2008
4.3.1.1 The operation of securitization
4.3.1.2 Why did the financial crisis happen?
5 Conclusion
References
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