Line Summary: This section is more difficult to read lightly
If you want to read it lightly, you should pass all the detailed explanation in the middle and read only the documentary mainly.
Bear Stearns has sold derivatives to the public, emphasizing that interest rates can be lowered through interest rate swaps
We did not explain the risk of interest rate swaps.
Bear Stearns will be acquired by JP Morgan Chase after the subprime mortgage crisis.
And JP Morgan Chase says this is an unwarranted contract.
This is because it is abuse of derivatives.
Then we need to understand the interest rate swaps that Bear Stearns sold to Kashino City.
Interest rate swaps are a kind of derivative called swap.
And swap is a transaction that promises to exchange each other.
Interest rate swaps are exchanges of interest rates, and currency swaps are exchanges of money (foreign exchange).
But if you think of it simply, this part of exchanging interest rates will feel strange.
What?
Assuming that there are two companies, Samsung Electronics and Ilbo, where will the credit score be higher?
Of course, Samsung Electronics> Ilbe? However, credit rating = interest rate is something you should know even if you are not interested in the economy.
There are two types of interest rates: fixed interest rates and floating interest rates.
Fixed interest rates are commodities for which the agreed interest rate continues to be applied at the time of the loan, and the variable interest rate is a product whose interest rate changes depending on changes in the market interest rate.
Because of this, fixed interest rates can be expressed in exact numbers such as 3% and 5%
The variable interest rate is expressed in the form of market interest rate + 1%, market interest rate + 3%.
According to the article, the COPIX linked rate has risen by 0.02%, which is the market interest rate for mortgage loans.
And since the floating rate of all banks is calculated based on the market interest rate, the market interest rate, Copys' 0.02% rise
The interest rate on all banks' lending rose by 0.02%.
In general, we use the COPIX for household loans, but in the case of corporate loans,
Various market interest rates such as CDs, KORIBOR, and financial bonds are being used.
Transactions between foreign companies or countries that are not domestic are used to calculate floating interest rates by using LIBOR as the market interest rate.
Assuming that both Samsung Electronics and Ilbo stores are swapping interest rates for loans,
(Market rate is denoted by X)
Samsung Electronics, which has a high credit rating, has a fixed interest rate of 5% and a variable interest rate of X + 1%
In the case of the Ilbo store where the creditworthiness is garbage, the fixed rate is 10% and the variable rate is X + 5%
The difference in fixed interest rates between the two companies is 5%, while the difference in floating interest rates is only 4%. Is not it??? If you can not calculate this,
Let's think about this case.
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A. If Samsung Electronics borrows at fixed rate / Ilbo store with floating rate = interest rate of X + 10%
B. If Samsung Electronics borrows at variable rate / Ilbo store at fixed rate = Total X + 11% interest rate
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I can not feel it.
Obviously, they only received loans at their own interest rates, but between 1 and 2 there is a 1% interest rate differential.
However, Samsung Electronics hopes for variable interest rates and Ilbo stores conclude interest rate swaps for each other if they want fixed interest rates.
1. Samsung Electronics borrows at 5% and Ilbe stores at X + 5%.
2. Through swapping interest rates between each other, Ilbo stores pay 5.5% interest to Samsung Electronics and Samsung Electronics pay X + 1% interest to Ilbo store.
3. Samsung Electronics paid 5% of the 5.5% received from Ilbo store to the bank + X + 1% to Ilbo store = X + 0.5%
4. Ilbo stores pay X + 5% to the bank by adding 4% to X + 1% received by Samsung + 5.5% to Samsung Electronics = 9.5%
Processes 3 and 4 are important.
Samsung Electronics actually borrowed 5% of the loan, but with interest rate swap, it gave the interest of X + 0.5% and 0.5% discount
The Ilbo store actually received a loan of X + 5%, but with interest rate swap, it gave 9.5% interest and 0.5% discount on its fixed interest rate
Through interest rate swaps, the form of the debt changes in the form of fixed interest rate → floating interest rate / floating interest rate → fixed interest rate
The difference between A and B is 1% profit, which Samsung Electronics and Ilbo store divided by 0.5%.
Hard to say? It is hard to do it. I will never understand it at once.
If you want to understand the interest rate swap, you should read this section slowly and think twice about it.
(I really tried to make it as easy to understand as possible.)
And just as the real estate (real estate broker ) is used to buy and sell houses, the bank acts as a broker for this swap transaction and collects the commission.
But there is one variable here.
It is the market interest rate X which is the standard of the floating rate.
Unlike fixed interest rates, which are constant until the repayment of principal and interest, the variable interest rate always changes with the change in market interest rate X.
If X goes constant, both sides can see a 0.5% profit.
But if X changes drastically ...? Someone is in big trouble.
Bear Stearns' employees are directly involved in the conversion from fixed rate → floating rate / floating rate → fixed rate through interest rate swap
But it did not warn about the risk of interest rate swap due to the sharp change in market interest rate.
It emphasizes only the bright side to sell the product and does not warn the dark side (loss possibility) precisely.
Everything is true. Only the rate of return is emphasized and the risk is not informed by the seller unless the contract or goods are analyzed in detail.
Bear Stearns employees compensate for the sale of interest rate swaps
I would have fooled him for incentives.
And a few years later, Casinos has suffered a huge loss of $ 1 million in interest due to a sharp change in market interest rates.
But this did not happen only in Kashino.
Banks have done the same thing in thousands of cities in the US and Europe.
Of course, the method is the same.
Emphasized only the bright side, hiding the dark side and selling derivatives to thousands of cities.
And with the rapid market changes, many cities that have entered interest rate swaps without sufficient understanding become bankrupt.
It was a moral hazard that used the obvious legal flaws.
It's not lawful, but it's not an obvious offense ...
It was their ability to make big profits by using parts that were not explicitly stated in the law.
Indeed, if you have the ability to take advantage of the loopholes of any law, not just an accountant,
And for banks, customers are bigger than the city.
It is a country or a country.
In 1999, the euro was introduced, and European countries hoped to join the eurozone.
Especially when countries with different credit and economic scale debt sizes use a single currency
Countries with high debt and bad credit are more likely to get into the eurozone.
(More information on the eurozone is sucked and is well on the human vs euro of the rapper.)
Especially Italy, with its heavy fiscal deficit, was looking for a way to get into the eurozone
We find the answer in derivatives trading with banks.
And, by trading in derivatives, the deficit is packed well for no deficit, and the eurozone joins.
But this was not a removal of the debt itself, but a kind of gimmick that changed the form of debt and prevented it from being recorded on the ledger.
This means that there are many ways to buy a car, such as a cash installment (finance, management) rental, etc.
It is very similar in terms of who is registered and how it is reflected in assets and liabilities, ie how it is displayed in the books.
And Greece also engages in derivatives trading with Goldman Sachs to cover many of its debt and deficit.
Greece, which has hidden its debt through derivatives, will join the eurozone in line with the eurozone financial standards
The bank sells derivatives, and its employees earn incredible incentives.
However, Greece, which has been hiding through debt rather than fundamentally solving it, eventually becomes more and more deficit
I got a bigger price.
A market that has grown too large A system that is too complex and diversified This is a current financial system issue.
It is a reality that even nations can not even imagine the derivatives that are traded offshore.
The three-headed futures option swap, which was discussed in Part 1, was not so complex and difficult as the original derivatives.
There is a farmer whose average annual turnover is 100 million won.
The farming is done in May ~ June and the harvest in October.
But nobody knows whether the farming will be a harvest or a harvest in that year.
And on average, there is a rice cake maker who consumes 100 million won worth of rice every year.
Every market has sellers and buyers. In this case, the seller is a farmer and I will take the example of a rice cake as a buyer.
A. If it is a good year - rice is overflowing. → rice price drops 50% = farmers lose money / rice cake gains
B. In case of famine - rice is scarce. → 50% rise in rice price = farmer gains / loss of rice cake
However, farmers and rice cake lovers do not aim to earn 50% = 50 million won of 100 million won through good harvests and poor harvests
The farmer sells rice to keep his business, and the rice cake longevity is to make rice cake and keep his business.
That is, it is advantageous for sellers and buyers to make long-term sales and purchase at a stable price rather than a rapid change in market price.
Therefore, it is not the harvest season to know the result of farming, but when rice is planted, rice is traded first while exchanging the down payment .
Trading the goods at the contracted price at the time of the planting, regardless of the price of the harvest. This is futures trading.
The first thing is to trade things at an agreed price.
When you describe one derivative, do you remember the word "underlying assets"?
In this case, a gift, or derivative, was made from rice as an underlying asset.
(Exactly speaking, the deal between a farmer and a caterpillar is a gift, not a gift, but the same concept, except for a few small parts.)
If the underlying asset is changed from rice to stock, it will become a stock futures (set = individual stock futures)
[Example: Samsung Electronics stock futures, KOSPI 200 futures, S & P futures, NASDAQ futures, etc.]
Gold (metal / raw material) or oil (energy) Agricultural products If you change to commodities such as livestock products, they become commodity gifts
[Example: Gold gift, Crude oil gift, etc.]
If foreign currency becomes the basic asset, it becomes currency futures.
[Example: yen dollar gift, euro dollar gift (yuusu = euro FX), yen dollar gift (enamel), Australian dollar gift (hanada)]
But futures trading has big weaknesses. If there really is a big harvest in the world and the price of rice declines 10 times?
Farmers will sell 10 million won worth of rice for 100 million won, and rice cooker will buy 10 million won worth of rice for 100 million won.
However, because futures trading is a promise, both sales and purchases must be mandatory.
In other words, the longevity of the cake is the loss of 90 million won.
But one of the remaining three options in the derivation does not happen.
The option is because the seller has the obligation to contract, but the buyer has the option .
For example, a real estate transaction is a ten percent (10%) of the principal amount (the sale price or deposit).
If you decided to buy a house worth 100 million won and paid a deposit of 10 million won to the seller
In a normal transaction, the transaction will be completed with a balance of 90 million won.
But if the house price drops by 50% before paying the balance?
Even if the buyer gives up 10 million won down payment and receives 10 million won penalty
New deals can see greater profits. This is the right or option .
The option is that the seller (seller) has the obligation to fulfill the contract but not the buyer (buyer).
This is not.
In option trading, like contracts of real estate, contracts are paid and contracts are paid at the same time, which is called option premium .
Compared with futures trading between a farmer and a longevity consumer, it is as follows.
1. A 10% down payment (KRW 10 million) is paid for rice with a current price of 100 million won, and a futures contract is concluded.
2. The price of rice is 50 million won
3. The longevity of longevity rice is 90 million won and the purchase of 50 million won of rice (loss) / The farmer sells 50 million won of rice (profit)
However, the case of option trading is different.
1. A 10% down payment (KRW 10 million) is paid for rice with current price of 100 million won and an option contract is concluded.
2. The price of rice is 50 million won
3. The longevity longevity loses the down payment and gives the other 50 million won to buy the rice / The farmer gets the down payment and sells the rice for 50 million won elsewhere
Oh! Alas!! In the case of futures trading, the longevity loss is estimated to be 50 million won.
Conversely, if rice prices rise
1. A 10% down payment (KRW 10 million) is paid for rice with current price of 100 million won and an option contract is concluded.
2. When 50% rise, the price of rice is 150 million won
3. The rice cooker will buy rice with a balance of 90 million won and buy rice of 150 million won / The farmer will sell rice with a balance of 90 million won and rice sold 150 million won
Previously, the longevity broke the contract, but the farmer could not break the contract.
No, then ... The farmer has to see the damage unconditionally ???
The market is fair.
In fact, the seller and the buyer were fixed because the farmer explained the condition that rice was sold to the longevity cook.
But the option is to sell rights to basic assets, not to sell rice or basic assets .
So option sellers can sell right to buy or sell separately.
In other words, the farmer can sell the rice to the longevity right to buy rice
The rice cake can sell to the farmer the right to sell rice to him.
This is a call option and a put option.
The option deal of the farmer and the rice cake lover described above was the right to the rice cake lover.
In other words, the farmer sold the right to live on a rice cake, which is a call option.
Conversely, in the case of a put option
1. A 10% down payment (KRW 10 million) is paid for rice with current price of 100 million won and an option contract is concluded.
2. The price of rice is 50 million won
3. Lucky Longeous Served $ 90,000 in Residue and Purchased $ 50,000 Rice / The farmer sold $ 50,000 in rice with a balance of $ 90,000.
1. A 10% down payment (KRW 10 million) is paid for rice with current price of 100 million won and an option contract is concluded.
2. When 50% rise, the price of rice is 150 million won
3. The longevity buyer gets a down payment and purchases rice of 150 million won elsewhere / The farmer loses the down payment and sells rice for 150 million won elsewhere
On the contrary, the option was transferred from the longevity to the farmer.
This is a put option.
It is a mistake in the first place because of the words used in these words.
Cole = climb / foot = down does not exist anywhere.
The call option is the right to sell the right put option.
If you buy a call option, you earn money from the upside, and you buy the put option.
And options, like futures, can create many options using a variety of underlying assets and are in fact being traded.
(There are all sorts of options of index, oil, gold, currency) and trading is possible.
I have looked at three of the most typical derivatives, futures, options and swaps
To be honest, if I understood all three things easily, I would put in a little exaggeration by itself and stretch it in 1%.
This is because it is difficult and difficult to understand.
And understanding futures option swaps does not mean that we understand all the financial systems of the world.
It is because there are thousands of derivatives, and it is possible to make any additional additions.
So if you are interested in investing, it is better to deepen one thing that you are good at rather than trying to do a lot.
It's because 0.01% of the world's financial figures on Wall Street do not know everything and do not do everything well.
- Part 2 End -
Perfect
Honestly, it's difficult. I tried really hard to explain it
Because it is difficult contents, I will let you know if you can comment on the part that you do not understand or the content of your question.
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