Formation et Conseil en finance de marché et finance d'entreprise

Functioning of derivatives

Functioning of derivatives · 02. June 2024

Total Return Swaps in Simple Terms

A Total Return Swap (TRS) is a derivative allowing one party to receive the total return of a credit asset (interest, principal, and capital gains/losses), while the other party receives regular payments based on a fixed or floating rate like EURIBOR. TRS enable credit risk transfer, leveraged exposure to fixed income, and synthetic access to illiquid assets, commonly used for hedging, regulatory capital management, and investment strategies.

The Put-Call Symmetry (PCS) Simply Explained

Put-Call Symmetry (PCS) links European put and call option prices via the forward price of the underlying asset. It requires frictionless markets, no arbitrage, zero drift, and symmetric asset returns. PCS is practical for pricing and hedging exotic options, offering a simpler alternative to dynamic hedging by balancing put and call strike prices against the forward price.

Reverse Convertibles in Simple Terms

Reverse convertibles sound complex but think of them as a two-in-one deal. You get higher interest, but there's a stock bet involved. If the stock stays steady or rises, you enjoy the interest. However, if it drops significantly, you could end up owning that stock instead. You can add a safety layer, called 'hedging', to protect your investment. But remember, while you can earn decent returns, you might miss out on big stock gains. #InvestmentBasics #ReverseConvertible #FinanceTips