INSTITUTO POLITECNICO NACIONAL

ESCUELA SUPERIOR DE COMERCIO Y ADMINISTRACION

UNIDAD SANTO TOMAS

ADMINISTRACION DE RIESGOS E INSTRUMENTOS DERIVADOS

PROFESOR: FLORES VASCONSELOS ALICIA

OPTIONS, WARRANTS EWAPS

ALUMNOS: CASTRO CONTRERAS SERGIO LUIS

CHAGOYA GONZALEZ LUIS ENRIQUE
MORALES GARCIA EDGAR

GRUPO: 5CV1
 OPTION
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What it is:
An option is a financial contract that gives an investor the right, but not the obligation,
to either buy or sell an asset at a pre-determined price (known as the strike price) by
a specified date (known as the expiration date).

How it works (Example):

Options are derivative instruments, meaning that their prices are derived from the price of
their underlying security, which could be almost anything: stocks, bonds, currencies, indexes,
commodities, etc. Many options are created in a standardized form and traded on an options
exchange like the Chicago Board Options Exchange (CBOE), although it is possible for the two
parties to an options contract to agree to create options with completely customized terms.

There are two types of options: call options and put options. A buyer of a call option has the right to
buy the underlying asset for a certain price. The buyer of a put option has the right to sell the
underlying asset for a certain price.

Here's a brief look at a few of the most common types of options:

Every option represents a contract between the options writer and the options buyer.
The options writer is the party that "writes," or creates, the options contract, and then sells it. If the
investor who buys the contract chooses to exercise the option, the writer is obligated to fulfill the
transaction by buying or selling the underlying asset, depending on the type of option he wrote. If
the buyer chooses to not exercise the option, the writer does nothing and gets to keep the premium
(the price the option was originally sold for).

The options buyer has a lot of power in this relationship. He chooses whether or not
they willcomplete the transaction. When the option expires, if the buyer doesn't want to exercise the
option, he doesn't have to. The buyer has purchased the option to carry out a certain transaction in
the future -- hence the name.

Why it Matters:

Investors use options for two primary reasons: to speculate and to hedge risk. Rational investors
realize there is no "sure thing," as every investment incurs at least some risk. This risk is what the
investor is compensated for when he or she purchases an asset.

Hedging is like buying insurance. It is protection against unforeseen events, but you hope you never
have to use it. Should a stock take an unforeseen turn, holding an option opposite of your
position will help to limit your losses.

If you'd like to read more in-depth information about options, check out these definitions:

Call Option -- Option to purchase the underlying asset.

Put Option -- Option to sell the underlying asset.
Options Contract -- The agreement between the writer and the buyer.
Expiration Date -- The last day an options contract can be exercised.
Strike Price -- The pre-determined price the underlying asset can be bought/sold for.
Intrinsic Value -- The current value of the option's underlying asset.
Time Value -- The additional amount that traders are willing to pay for an option.
Vanilla Option -- A normal option with no special features, terms or conditions.
American Option -- Option that can be exercised any time before the expiration date.
European Option -- Option that can be exercised only on the expiration date.
Exotic Option -- Any option with a complex structure or payoff calculation.
 WARRANTS
Summary:

Warrants are securities that are traded in stock markets and grant the owner the right to buy or sell a
certain asset or underlying security. It is important to stress that the investor acquires a right, not an
obligation, and can exercise that right for a set period of time.
Investing in warrants is different from directly investing in the underlying asset, and as previously
mentioned, allows investors to obtain returns based on the evolution of the underlying asset, without
having to directly invest in this asset. As large quantities do no need to be invested, it can help to
optimize portfolio diversification – so important when planning investments.
Investing in warrants is simple and is not very different from the procedure of buying and selling
shares. Warrant owners can buy or sell the same warrant as many times as they want. It is necessary
to hold on to warrants until their expiration date to maximize the investment since there is a market
that guarantees their liquidity.
A warrant is a securitized option. In other words, an option on an asset in the form of a security that
has an official listing, and it is traded in an organized market. Its price is therefore set transparently.
The issuer of the warrant defines its characteristics (strike price, expiration date, type, underlying
asset) and investors selects the warrant that best fits their profile in terms of market expectations.

Unlike stock, warrants offer the possibility of investing in rising or falling markets, so that taking a
position can produce profit regardless of whether the market gains or loses. Small amounts can be
invested in warrants, as profits multiply from the leverage effect if the market evolves as investors
expected.

Types of Warrants:
Warrant call: When an investor decides to bet on the upside and buys a warrant Call, he acquires
the right to buy a certain amount of the underlying asset at a fixed price (exercise price) at any time
from the date of purchase until the expiration date ( if the warrant is American) or only on the
expiration date.

Warrant Put: Otherwise, when the investor expects a decrease in the price of the underlying asset
then he must buy a Put Warrant thus acquiring the right to sell a certain amount of the underlying
asset at a fixed price (strike price) at any time from the date of purchase until the expiration date (if
the warrant is American) or only on the due date (if the warrant is European).

Definitions :
The deposit, like a warrant, allows us to see how the market evolves during a period of time and
decide whether or not to purchase the product at the set price.
Warrants can be either the right to purchase (call warrant) or the right to sell (put warrant) and are
referenced against an asset or underlying security (a share, an index, a currency, etc.). When
acquiring a warrant, investors pay a non-refundable premium in exchange for this right. The right
will remain active and can be exercised until the expiration date.

A financial asset is a financial instrument that grants its buyer the right to future income from the
seller. That is, it is a right over the real assets of the issuer and the cash that they generate.
A warrant is a financial derivative, issued OTC (over the counter), which gives its buyer the right to
buy (Warrant call) or sell (Warrant put) a certain financial asset (underlying asset), in a timeframe
and at a price previously stipulated (exercise price) in exchange for the payment of a premium.
A warrant is very similar to a financial option. In fact, we can classify them as a type of option. Both
grant a right of purchase or sale to your buyer. The main difference between a warrant and an option
is that warrants are purchased from an issuer. Therefore, they can only be bought, while anyone
can buy or sell options (acting as an issuer).

Functions:

For the rest, the operation of the warrants is similar to that of any other option.
To acquire a warrant, you have to pay a premium set by the issuer.
The payment of this premium gives you the right to buy (calls) or sell (puts) shares (or the underlying
asset) at a certain price and at a certain date in the future.
Thanks to the variation in prices of the price of the underlying asset, it will be possible to obtain a
profit by buying shares at a price lower than the market price, or by selling shares at a price higher
than the market price.
In addition, puts warrants can be used as an insurance for the securities portfolio (like puts options),
since, if the price falls, we can sell our shares at a price higher than the market price.

Finally, it is also feasible to obtain an economic return through the purchase and sale of the warrants.
The volatility of the prices of the underlying assets also influences the premium or price of the
warrants.

* As a rule, a rise in prices causes the premium of warrants calls to increase and that of warrants
puts to be reduced.

* Likewise, the decrease in the prices of the underlying assets causes the premium of the warrants
calls to be reduced and that of the warrants puts to increase.

In case this variation in the premiums is favorable, we only have to sell our warrants and thus obtain
the corresponding benefit.
Advantage:
The main advantage to be mentioned of these
options is that your purchase is made very
simply and is that as we said at the beginning
do not require the signing of any contract or
procedure.
Disadvantages:
Their prices tend to be higher than that
presented by the options. This is generated for
several reasons. The first one is that the
treatment of its emission generates a higher
cost, this is because the bank when issuing it
seeks to have a benefit.

Equally it is necessary to emphasize the fact Considering these aspects it is clear that for the
that they present a variety of underlyings which investor it may be cheaper to buy other options,
can represent an enormous point in favor of the such as Meff's, to acquire warrants.
investor. However, it must be clear that
generally each of the underlying assets have
lower exercise prices as well as lower maturity
dates.

Allows to perform more complex strategies than Also their prices are raised by the difficulty that
cash sale is presented for their correct training. This
obviously occurs because they can not be sold
without having previously bought. In its price
also influences the management that its issuers
give to volatility.

Essentially, you can benefit from the leverage
effect. This leverage means that the movements
experienced in the prices of the Warrants are
much broader than those of the underlying,
which will allow me to:
The main difference between warrants and
options is that warrants can not be sold if they
have not been previously purchased, while with
options it is possible to sell first and repurchase
later.

*Obtain higher potential returns by investing the

same amount of money.
*Get the same profitability but investing lower
amounts.
 SWAPS
A swap is a financial derivative in which two parties agree to exchange during a set
period, two financial flows (income and payments) of interest in the same currency
(interest rate swap) or in a different currency (exchange rate swap) over a specific
nominal and specifying an expiration date.

Swaps are negotiated bilaterally by each of the parties in over the counter markets
(that is, they are not traded on organized markets). This fact makes the contract
finally agreed to be more useful, flexible and adjusted for the initial needs that were
pursued with the agreement by each of the parties.

In terms of its use and objective, they are products used both for speculation and
to cover exposure to a risk. In addition, in the case of interest rate swaps, in the
absence of nominal exchange, they allow leveraged positions (see leverage).

This type of financial contract was born in the 70s in the United Kingdom. That
said, the notoriety of the swap was achieved thanks to the operation that the World
Bank and the US company IBM carried out in 1981, through the Salomon Brothers
bank. In this agreement, the technological firm IBM was looking for more financing
in dollars in exchange for currencies of European countries, specifically francs and
Swiss marks. For its part, the World Bank sought to obtain financing in these
currencies.

Types of Swaps
-Swaps of interest rate: It consists of the payment of fixed periodic interest by one
of the parties in exchange for receiving variable periodic interests by the other
party referenced to a certain index, such as the Euribor, Eonia (both used in the
area). euro) or Libor (London). There is no exchange of principal or currency risk,
on the other hand if there is interest rate risk since the underlying asset is a
deposit.
There are, in turn, two types of interest rate swaps:

Interest rate swaps (IRS): consists in the exchange of interest flows at a fixed rate
by others at a variable rate in the same currency.
Basis swaps: consists in the exchange of interest rate types at a fixed rate by
others at a variable rate in the same currency but with different frequencies or
bases. For example, interest can be exchanged for the index referenced to the
Euribor 3 months against the Euribor 6 months. In this example, we are looking for
a part of the interest rate curve to move in one direction more than the other, so we
will obtain a benefit for the difference expressed in basic points. If it moves in the
opposite direction, we will be the ones who will pay the other party.
-Swaps of exchange rate: Consists in the exchange of fixed periodic flows by one
of the parties in a currency in exchange for receiving variable periodic interests for
the other party in a different currency, such as receiving interest generated in the
dollar against the euro. There is an exchange of principal at the beginning and the
expiration of the contract, currency risk and interest rate risk.

There are, in turn, three types of currency swaps:

Currency Swap: consisting of the exchange of fixed rate loans in different

currencies.
Floating rate currency swap: consisting of the exchange of variable rate loans in
different currencies.
Cross currency swap: consisting of the exchange of a fixed rate loan with a
variable rate loan in different currencies.
Example of an interest rate swap
In this case, we assume that we have purchased an interest rate swap.
Specifically, we have purchased an Interest Rate Swap (IRS) for 2 years for a
nominal value of 1,000,000 currency units where we pay a fixed rate (Euribor 3
months) and where we will receive a variable interest rate (Euribor 6 months). .

When buying the IRS for 2 years, we are waiting for the Euribor 6 months to do
better than the Euribor 3 months. Well, with 3 months we will be paying a fixed rate
for the entire life of the swap, and instead, for the leg of 6 months we will have the
possibility to practice larger settlements with higher interest rates.

In the hypothetical case that we do the opposite operation, that is to say, sell the
IRS to 2 years, we expect that the interest rates to 6 months go down. We would
pay a variable interest rate for 6 months and we would receive a fixed interest rate
for 3 months. If the 6-month interest rates do worse than the short-term rates when
making the settlements, we would pay a lower amount with the lower interest rates
and we would receive a fixed rate established at the beginning of the operation.