Evaluating Risk Impact & Mitigation in Financial Derivatives Contracts

This report examines the use of financial derivatives—specifically futures, options, and swaps—by an investment banker to generate revenue and prevent financial loss. It calculates the potential risk impact of extrinsic and intrinsic factors for mitigating risk values. The analysis focuses on how futures contracts compensate for negative changes in the S&P 500, reducing portfolio risk. Shorting options helps minimize investment risk and control profits. Option contracts manage put-call parity, mitigating currency exchange impacts and maximizing profits. Swap contracts improve investment returns by potentially changing interest rates from LIBOR to fixed rates, minimizing interest payments. Appendices provide detailed calculations for futures, options, and swap contracts, including contract values, premiums, interest rates, and swap rates.

Running head: FINANCIAL DERIVATIVES
Financial Derivatives
Name of the Student:
Name of the University:
Authors Note:

FINANCIAL DERIVATIVES
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Table of Contents
Calculating the potential risk impact of extrinsic and intrinsic factors for mitigating the risk
value:..........................................................................................................................................2
Reference and Bibliography:......................................................................................................3
Appendices:................................................................................................................................4

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Calculating the potential risk impact of extrinsic and intrinsic factors for mitigating the
risk value:
The calculation conducted on futures contract, option contract and swap contract
relevantly have different level of extrinsic and intrinsic factors, which is mitigating the risk
values of the investments. The futures contract is directly compensating the loss of any
changes in the negative value of S&P 500, which is directly reducing the risk value of the
portfolio. The shorting of S&P 500 might help in minimising the negative impact of declining
value of capital market and reducing the risk from investment fund. Chance & Brooks (2015)
stated that with the use of shorting options investors are able to minimise the level of risk
from investment and control their profits.
With the help of option contract investors are able to minimise the level of returns
from investment, which could improve their profits over time. In addition, option contact
relevantly controls put-call parity, which minimises the negative impact from currency
expense and maximise the profits from operations. The option contract adequately minimises
the level of risk engulfed in currency exchange and reduces the level of risk from investment.
The Swap contract is mainly an adequate measurer, which is used by organisation for
improving the level of returns from investment. in addition, the change in interest rate can be
conducted from LIBOR rate to fixed interest rate to minimise the level of interest payments
from operations. This reduction in interest rate might help in minimising the level of interest
from loans, as interest rate is reduced with the help of Swap contracts.

FINANCIAL DERIVATIVES
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Reference and Bibliography:
Chance, D. M., & Brooks, R. (2015). Introduction to derivatives and risk management.
Cengage Learning.
us.investing.com. (2018). investing.com India. Retrieved 3 July 2018, from
https://us.investing.com/currencies/eur-usd-options

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Appendices:
Futures Contract:
Particulars Amount
Portfolio Value $ 1,000,000
Future Contract Value $ 955,500.00
Future contract S&P 500
Strike price $ 2,730.00
Contract 25.00
Value of the Contract $ 68,250.00
Number of Futures Contract 14.00
Option Contract:
Particulars Amount
EUR/USD 1.7000
USD/EUR 0.6250
Call Premium USD 0.0387
Put Premium EUR 0.0163
Strike price USD 0.6250
Annual interest rate 0.0221
Time 0.5000
Initial price of Underlying (Put-Call Parity
Equation)
0.6407

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Swap Contract:
One-year pay fixed Value
Fixed Interest rate 2018 2.5000%
Fixed Interest rate 2019 3.0000%
Fixed Interest rate 2020 3.5000%
Floating U.S. LIBOR Value
6-month LIBOR interest rate 2.4638%
6-month LIBOR interest rate 2018 2.4919%
6-month LIBOR interest rate 2019 2.5203%
6-month LIBOR interest rate 2020 2.5491%
Particulars Value
Swap rates for calculation 2018 0.0081%
Swap rates for calculation 2019 0.4797%
Swap rates for calculation 2020 0.9509%