Analysis of derivative contracts

What are Derivative Contracts

Derivative contracts are written agreements whose value derives from one or variables below. They are mainly used as products addedsuch as the bondsor often integrated with the packages remuneration managers of large companies.

They are very common in large investment projects, such as construction projects, in which companies are highly exposed to banks.

The use of contracts derivatives as a financial instrument has roots going back as far as the Middle Ages. Over the centuries it has been used as a variable above the price goldof the cattle or much more.

Over the centuries, the exchange of derivatives, regulated by a specific Baghad - and still has - as its basis the States United (Chicago in the lead and then New York) and England, where they are equally widespread.

Physical trading venues and e-marketplaces

The elected physical trading venues for derivative contracts are the markets by Bagwithin which may be present the so-called 'chambers of compensation" (cleaning room), structures dealing with absorb the risk in case one of the contracting parties defaults.

Despite Chicago e New York are the main Bags by bargaining of derivatives, there are facilities for this purpose all over the world.

Beyond physical locations, today derivatives are traded mainly in the markets electronic. Not only on the platforms of trading - where, however, it is often possible to bargain for these products - but often also in individual negotiations between the parties via telephone or e-mail.

This is especially the case for markets "Over The Counter", i.e. those with reports direct between the parties or exchanges that take place in private clearing houses (outside the classical exchange circuit).

It is important to specify that the Legislator has long been trying to curb over-the-counter trading, however with little success.

Studio Cap very often has to perform bank appraisals on derivatives Swap signed over the counterby virtue of financial institutions offering such products in this mode off the radar of the stock market circuit.

Remember that Studio Cappuccio is also renowned for other types of services:

• Mortgage analysis
• Checking account statements
• Unit-linked policy audits 

Types of derivative contracts

There are different types of derivative contracts, distinguished by specific characteristics. Let's look at the main ones.

Forward Contract - In the case of a Forward two parties agree to buy at a future date an underlying product at a certain price (the buying party is referred to as the Longwhile the seller is defined as Short).

Forward contracts can be either 'spot', i.e. evidenced at the time of conclusion, or 'forward', i.e. governed by a future date on which the parties will buy or sell an underlying product.

Such instruments are not infrequently Over The Counterconcluded, for example, between two financial institutions or between banks and private individuals.

Swap - This is a type of contract Forward over the counter in which two companies promise to exchange future payments.

Future - Futures contracts are in every respect identical to forwards, the only difference being that futures are traded on exchanges (such as the Chicago Board of Trade, the CBOT).

Options - Here we are faced with the most complex type of derivatives. Suffice it to say that A Nobel Prize in Economics was also awarded for the evaluation of Options.

An option is a right to buy or sell an asset at a certain date and at a certain price.

Regulation of derivative contracts

Italy lags behind in regulation of this kind of financial instruments, mainly because they belong to an Anglo-Saxon economic culture and are therefore less used in our country.

Despite this, documents have been published over the years such as the Consob Intermediaries Regulation which, in its various resolutions, tries to regulate an activity that is increasingly widespread in our territories as well.

The regulation of derivative securities tend to clarify a fundamental aspect: at the time of stipulation, it is important that at contractorespecially if private, are addressed questions aimed at identifying his degree of preparation and understanding of such complex products.

For this reason, it is requested experience possible, degree of propensity at risk, history financial etc.

Banking information on possible risks

The Bank is obliged to provide information appropriate on derivatives, their nature and use, disclosing their risks and effectively protecting the interlocutor from any hidden risks, so that he is aware of the investment choice.

Many litigationto date, are based precisely on eventual inadequate information provided to the customer, or lack of knowledge of the instrument on the part of the customer.

A fundamental passage of the regulation Consob concerns the operations by coveragei.e. those in which the purchase of derivatives is intended to 'hedge', or protect, a previous investment (such as the first home loan).

These operations must be defined on the basis of a clear risk reduction functiona high correlation between the hedged item and the financial instrument (thus avoiding speculative purposes) and an accurate internal control system of procedures.

The main objections in the case of a hedging derivative contract relate to:

• non-disclosure of implicit costs;
• no mark-to-market indication;
• negative reference rate;
• correspondence of the notional to the amounts lent to the bank;
• withdrawal clause;
• presence of the framework contract.

In this regard, it is therefore worth remembering that the role of the Periti as the experts of Studio Cap is precisely to ascertain the correct application of regulations or to detect possible discrepancies of one of the parties.

To whom our derivatives contract analysis service is addressed