Free Financial Markets Operations Management by Keith Dickinson Page B

the insurance company wishes to revert to the original allocation, then it simply needs to close out the two futures contracts.
Changing risk: A corporation might be borrowing money at a variable rate of interest and may be concerned that interest rates will increase. It could enter into an interest rate swap, in which it would swap its variable interest payments with, for example, a fixed rate of interest. In this way, if interest rates do increase as feared, the corporation is protected by paying interest at a fixed rate.
TABLE 2.29 Arbitrage government bond and futures contract
Government Bond
Bond Price
Long-Dated Bond Future
Futures Price
Japan 10-year
99.44
Japan 10yr contract
114.14
If the prices change as follows…
Price decreases to:
99.40
Price increases to:
114.20
The arbitrageur would buy the bonds believing the price will rise…
The arbitrageur would short the futures believing the price will fall…
Buy bonds @
99.40
Sell futures @
114.20
If prices then settle back to approximately where they were, the arbitrageur will sell the bond position and close-out the futures position.
Sell bonds @
99.43
Buy futures @
114.15
The sale of the bond has made a profit…
The close-out of the futures has made a profit…
Profit:
0.03
Profit:
0.05
    In April 2009, the International Swaps and Derivatives Association (ISDA) announced the results of its Derivatives Usage Survey of the world's biggest 500 companies. It found that 94% of these companies were users of derivative products. Table 2.30 shows the usage by industry sector and the type of derivative used and Table 2.31 shows the usage by country.
TABLE 2.30 Usage by industry sector and type of derivative
Total
Derivatives
Interest
Sector Name
Companies
Overall
Rate
Forex
Commodity
Credit
Equity
Basic materials
86
97%
70%
85%
79%
0%
6%
Consumer goods
88
91%
81%
84%
39%
1%
9%
Financial
123
98%
94%
96%
63%
76%
80%
Healthcare
25
92%
80%
72%
8%
4%
20%
Industrial goods
49
92%
86%
86%
37%
2%
20%
Services
40
88%
75%
85%
35%
3%
13%
Technology
65
95%
86%
92%
15%
6%
15%
Utilities
24
92%
92%
88%
83%
0%
8%
Total
500
94%
83%
88%
49%
20%
29%
    Source: ISDA (online). News release, 23 April 2009 re derivatives usage by the world's top 500 companies. Available from www2.isda.org/functional-areas/research/surveys/end-user-surveys . [Accessed Thursday, 12 December 2013]
TABLE 2.31 Numbers and percentage of users per country
Country
Users
Usage
Canada
14
100.0%
France
39
100.0%
Japan
64
100.0%
Netherlands
13
100.0%
Switzerland
14
100.0%
UK
34
100.0%
Germany
36
 97.3%
USA
140
91.5%
South Korea
13
86.7%
China
18
62.1%
    Source: ISDA (online). News release, 23 April 2009 re derivatives usage by the world's top 500 companies. Available from www2.isda.org/functional-areas/research/surveys/end-user-surveys . [Accessed Thursday, 12 December 2013]
    These are the main uses and users of derivative products. From an operational point of view, the reasons for using derivatives tend to be of secondary importance, however interesting these reasons might be. We are more concerned by what needs to happen once a derivatives transaction has taken place. The best way to approach this is to consider exchange-traded derivative transactions separately from OTC transactions, remembering that more and more of the latter are being cleared centrally rather than bilaterally between the buyer and seller.
2.7 EXCHANGE-TRADED DERIVATIVES
2.7.1 Introduction
    Before we look at exchange-traded derivatives (ETDs) in more detail, please refresh your memories regarding the definitions of two types of ETD, i.e. futures and options.
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Q&A
    ----
Question
    What words or phrases in the definitions re-occur?
Answer
    Here are the definitions that you saw above, with the key words or phrases highlighted in italic :
A futures contract is a legally binding obligation to buy or sell a standard amount of a standard asset at a specific time in the future for a certain price that is agreed today.
A call option gives