Читать книгу Derivatives - Pirie Wendy L. - Страница 19

Economic historians know that derivatives markets have existed since at least the Middle Ages. It is unclear whether derivatives originated in the Asian rice markets or possibly in medieval trade fairs in Europe. We do know that the origin of modern futures markets is the creation of the Chicago Board of Trade in 1848. To understand why derivatives markets exist, it is useful to take a brief look at why the Chicago Board of Trade was formed.

In the middle of the 19th century, midwestern America was rapidly becoming the center of agricultural production in the United States. At the same time, Chicago was evolving into a major American city, a hub of transportation and commerce. Grain markets in Chicago were the central location to which midwestern farmers brought their wheat, corn, and soybeans to sell. Unfortunately, most of these products arrived at approximately the same time of the year, September through November. The storage facilities in Chicago were strained beyond capacity. As a result, prices would fall tremendously and some farmers reportedly found it more economical to dump their grains in the Chicago River rather than transport them back to the farm. At other times of the year, prices would rise steeply. A group of businessmen saw this situation as unnecessary volatility and a waste of valuable produce. To deal with this problem, they created the Chicago Board of Trade and a financial instrument called the “to-arrive” contract. A farmer could sell a to-arrive contract at any time during the year. This contract fixed the price of the farmer’s grain on the basis of delivery in Chicago at a specified later date. Grain is highly storable, so farmers can hold on to the grain and deliver it at almost any later time. This plan substantially reduced seasonal market volatility and made the markets work much better for all parties.

The traders in Chicago began to trade these contracts, speculating on movements in grain prices. Soon, it became apparent that an important and fascinating market had developed. Widespread hedging and speculative interest resulted in substantial market growth, and about 80 years later, a clearinghouse and a performance guarantee were added, thus completing the evolution of the to-arrive contract into today’s modern futures contract.

Many commodities and all financial assets that underlie derivatives contracts are not seasonally produced. Hence, this initial motivation for futures markets is only a minor advantage of derivatives markets today. But there are many reasons why derivative markets serve an important and useful purpose in contemporary finance.

5.1. Risk Allocation, Transfer, and Management

Until the advent of derivatives markets, risk management was quite cumbersome. Setting the actual level of risk to the desired level of risk required engaging in transactions in the underlyings. Such transactions typically had high transaction costs and were disruptive of portfolios. In many cases, it is quite difficult to fine-tune the level of risk to the desired level. From the perspective of a risk taker, it was quite costly to buy risk because a large amount of capital would be required.

Derivatives solve these problems in a very effective way: They allow trading the risk without trading the instrument itself. For example, consider a stockholder who wants to reduce exposure to a stock. In the pre-derivatives era, the only way to do so was to sell the stock. Now, the stockholder can sell futures, forwards, calls, or swaps, or buy put options, all while retaining the stock. For a company founder, these types of strategies can be particularly useful because the founder can retain ownership and probably board membership. Many other excellent examples of the use of derivatives to transfer risk are covered elsewhere in the curriculum. The objective at this point is to establish that derivatives provide an effective method of transferring risk from parties who do not want the risk to parties who do. In this sense, risk allocation is improved within markets and, indeed, the entire global economy.

The overall purpose of derivatives is to obtain more effective risk management within companies and the entire economy. Although some argue that derivatives do not serve this purpose very well (we will discuss this point in Section 6), for now you should understand that derivatives can improve the allocation of risk and facilitate more effective risk management for both companies and economies.

5.2. Information Discovery

One of the advantages of futures markets has been described as price discovery. A futures price has been characterized by some experts as a revelation of some information about the future. Thus, a futures price is sometimes thought of as predictive. This statement is not strictly correct because futures prices are not really forecasts of future spot prices. They provide only a little more information than do spot prices, but they do so in a very efficient manner. The markets for some underlyings are highly decentralized and not very efficient. For example, what is gold worth? It trades in markets around the world, but probably the best place to look is at the gold futures contract expiring soonest. What is the value of the S&P 500 Index when the US markets are not open? As it turns out, US futures markets open before the US stock market opens. The S&P 500 futures price is frequently viewed as an indication of where the stock market will open.

Derivative markets can, however, convey information not impounded in spot markets. By virtue of the fact that derivative markets require less capital, information can flow into the derivative markets before it gets into the spot market. The difference may well be only a matter of minutes or possibly seconds, but it can provide the edge to astute traders.

Finally, we should note that futures markets convey another simple piece of information: What price would one accept to avoid uncertainty? If you hold a stock worth $40 and could hedge the next 12 months’ uncertainty, what locked-in price should you expect to earn? As it turns out, it should be the price that guarantees the risk-free rate minus whatever dividends would be paid on the stock. Derivatives – specifically, futures, forwards, and swaps – reveal the price that the holder of an asset could take and avoid the risk.

What we have said until now applies to futures, forwards, and swaps. What about options? As you will learn later, given the underlying and the type of option (call or put), an option price reflects two characteristics of the option (exercise price and time to expiration), three characteristics of the underlying (price, volatility, and cash flows it might pay), and one general macroeconomic factor (risk-free rate). Only one of these factors, volatility, is not relatively easy to identify. But with the available models to price the option, we can infer what volatility people are using from the actual market prices at which they execute trades. That volatility, called implied volatility, measures the expected risk of the underlying. It reflects the volatility that investors use to determine the market price of the option. Knowing the expected risk of the underlying asset is an extremely useful piece of information. In fact, for options on broad-based market indices, such as the S&P 500, the implied volatility is a good measure of the general level of uncertainty in the market. Some experts have even called it a measure of fear. Thus, options provide information about what investors think of the uncertainty in the market, if not their fear of it.19

In addition, options allow the creation of trading strategies that cannot be done by using the underlying. As the exhibits on options explained, these strategies provide asymmetrical performance: limited movement in one direction and movement in the other direction that changes with movements in the underlying.

5.3. Operational Advantages

We noted earlier that derivatives have lower transaction costs than the underlying. The transaction costs of derivatives can be high relative to the value of the derivatives, but these costs are typically low relative to the value of the underlying. Thus, an investor who wants to take a position in, say, an equity market index would likely find it less costly to use the futures to get a given degree of exposure than to invest directly in the index to get that same exposure.

Derivative markets also typically have greater liquidity than the underlying spot markets, a result of the smaller amount of capital required to trade derivatives than to get the equivalent exposure directly in the underlying. Futures margin requirements and option premiums are quite low relative to the cost of the underlying.

One other extremely valuable operational advantage of derivative markets is the ease with which one can go short. With derivatives, it is nearly as easy to take a short position as to take a long position, whereas for the underlying asset, it is almost always much more difficult to go short than to go long. In fact, for many commodities, short selling is nearly impossible.

5.4. Market Efficiency

In the study of portfolio management, you learn that an efficient market is one in which no single investor can consistently earn returns in the long run in excess of those commensurate with the risk assumed. Of course, endless debates occur over whether equity markets are efficient. No need to resurrect that issue here, but let us proceed with the assumption that equity markets – and, in fact, most free and competitive financial markets – are reasonably efficient. This assumption does not mean that abnormal returns can never be earned, and indeed prices do get out of line with fundamental values. But competition, the relatively free flow of information, and ease of trading tend to bring prices back in line with fundamental values. Derivatives can make this process work even more rapidly.

When prices deviate from fundamental values, derivative markets offer less costly ways to exploit the mispricing. As noted earlier, less capital is required, transaction costs are lower, and short selling is easier. We also noted that as a result of these features, it is possible, indeed likely, that fundamental value will be reflected in the derivatives markets before it is restored in the underlying market. Although this time difference could be only a matter of minutes, for a trader seeking abnormal returns, a few minutes can be a valuable opportunity.

All these advantages of derivatives markets make the financial markets in general function more effectively. Investors are far more willing to trade if they can more easily manage their risk, trade at lower cost and with less capital, and go short more easily. This increased willingness to trade increases the number of market participants, which makes the market more liquid. A very liquid market may not automatically be an efficient market, but it certainly has a better chance of being one.

Even if one does not accept the concept that financial markets are efficient, it is difficult to say that markets are not more effective and competitive with derivatives. Yet, many blame derivatives for problems in the market. Let us take a look at these arguments.

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The Chicago Board Options Exchange publishes a measure of the implied volatility of the S&P 500 Index option, which is called the VIX (volatility index). The VIX is widely followed and is cited as a measure of investor uncertainty and sometimes fear.