The data model mining breakdown of financial derivatives

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1 The data model mining breakdown of financial derivatives Buriánková, P. University of Finance and Administration, Prague, Czech Republic Abstract The work deals with the data model mining breakdown of financial derivatives. Derivatives are financial instruments whose value is derived from the value of the underlying asset. These derivatives can be classified according to various criteria that each entity could choose financial derivative that is most convenient for him. It depends on each body and its aversion to risk, the required amount of success and marketability time to market of financial derivative. Swap the selected named db x-trackers II EURO Inflation Swap 5 yeartri ETF on the Frankfurt Stock Exchange is illustrated how the swap behaves in a given period of 50 days and subsequently shown Gaussian curve. Keywords: Financial derivatives, swap, die Börse Frankrfurt, Gaussian curve I. INTRODUCTION A financial derivatives are a specific group of derivatives, and those derivatives whose underlying assets are various financial instruments or financial instruments, ie securities. In practice, you can meet financial derivatives of all the above types, ie, financial futures, financial forwards, financial options and financial swaps. II. TYPES OF DERIVATIVES Derivatives can be structured in many different aspects, the basic can be considered as follows: Type of risk to which the derivative bound (resp. which of the derivative can be used to secure or speculate on it). The nature of the rights arising from the contract. Form of trading. Purpose of the use of derivatives (Dvořák, 2005). Derivatives according to the type of risk and the underlying instrument Market risk derivates: they are structured so that they can use them to ensure against market (price) risks (or speculate on them). Market (price) risk can further decompose according to the type of instrument to which the price applies, and accordingly subdivide derivatives: Interest rate - interest rate instrument whose price is directly affected by the development of market interest rates - Currency- have in the instrument, showing the positions in different currencies. Equity - which is basically lying instrument equity instrument commodity - a commodity instrument lies at the basis. Derivatives for credit risk: provide a hedge against credit risk (or speculation to them) in a way that the resultant performance is tied to changes in solvency (credit rating) of a body or instrument. Derivatives for other risks: derivatives can be constructed for other types of risks, such as weather derivatives (affected by the development of weather - temperature, rainfall) (Dvořák, 2005). 102

These derivatives can be classified according to various criteria that each entity could choose financial derivative that is most convenient for him.

2 Derivatives according to the nature of law The binding can be distinguished: Unconditional futures contracts (fixed) - the position of both sides is the same in that they have the right and duty at the same time agreed to meet the new book store. Conditional futures (options contracts) - the entity obtains the right to buy, but not the obligation, to complete trade in the future at the pre-agreed terms, the seller has the obligation to request the buyer to make the trade (Dvořák, 2005). Derivatives trading by form Derivatives may be traded either on an exchange or outside. Stock futures are traded as a standardized derivative contracts on stock exchanges. OTC futures contracts are standardized contracts traded on the OTC markets. The over the counter derivatives according to the theme using Financial derivatives may be used in practice for any of the following reasons: Hedging lies in the fact that derivatives can be fixed by using a price instrument on the agreed date in the future. Speculation is characterized by the fact that when it is open to a position in the derivative market. Speculation is trying to capitalize on price trends, either, that the price of the derivatives trade will be lower or higher than the spot price will be in the basilar instrument lying on the due date for which this instrument can on the spot market to sell or buy. Arbitrage is based on the price differences that may arise in terms of time and territorial distribution of financial derivatives and their characteristics. (Dvořák, 2005). III. THE MOST COMMON TYPES OF FINANCIAL DERIVATIVES Forwards These are instruments that are traded on the OTC markets. Agreement on interest rate futures Agreement on fixed-term interest rate is non-standardized OTC interest rate derivative contract that allows the parties to agree on a specified future date, a fixed interest rate for a specific transaction. In this contract, the Contracting Parties generally agreed subject transaction, price and delivery date. (Záškodný, Pavlát, Budík, 2007) Futures Instruments are used exclusively on the stock markets. Futures contract is an agreement between two parties setting out the terms of exchange between them, which will be held at a future date. (Záškodný, Pavlát, Budík, 2007) Futures contracts are standardized contracts for future exchange of specific goods in specific quantities and to a specific future date. Financial futures are agreements to exchange financial instruments such as securities, fixed income (such as government bonds), indices of securities or foreign currencies. (Záškodný, Pavlát, Budík, 2007) Options Option represents a contract between the option buyer and the optiton seller. This agreement entitles the buyer of an option to buy or sell the underlying asset at a predetermined strike 103

Conditional futures (options contracts) - the entity obtains the right to buy, but not the obligation, to complete trade in the future at the pre-agreed terms, the seller has the obligation to

3 price on the maturity date or at any time during the specified period. Obtained for the right buyer must pay the seller the option premium. The seller has the obligation to sell the underlying asset if they buyer of the option applies his right. (Pavlát, Záškodný, 2012) Types of options Call option is the right to buy an agreed amount of securities at an agreed price (the strike price - exercise price) for a specified period piece. The buyer acquires the right to purchase the securities. The seller is obliged to deliver securities at a specified date to. Put option is the right to sell an agreed amount of securities at an agreed (strike) price per piece in the specified period. The buyer is not obliged to exercise a put option. It will be realized only if the price of the securitis falls drops below the strike price. European options can only be applied at the date of expiry (expiration day). American option can exercise their owner from the date of their acquisition anytime expiration day. Synthetic cap interest rate options or interest rate options are among the synthetic interest rate options. It is a loan agreement with a variable interest rate. It is guaranteed in the contract that the interest rate never rises above a specified amount. Synthetic interest rate options Floor is also a synthetic interest rate options. It is a loan agreement with a variable interest rate. Contract is guaranteed that the interest rate will never drop below a specified amount. Warrants are essentially call options that companies (issuers of securities) emit for sale of newly issued securities. (Záškodný, Pavlát, Budík, 2007) Swaps Swap can be characterized as contractually agreed exchange predetermined cash-flow between two or more entities on specific dates in the future. Swaps are used in OTC securities. (Pavlát, Záškodný, 2012) Types of swaps The interest rate swap is an agreement between two parties to exchange payments and refixed interest rate payments for floating interest rates (the so-called floating rate) in the same currency, which refers to an agreed notional reference amount and to a certain agreed period. This nominal amount is equivalent to the value of the underlying asset or liability is not itself an object of exchange, ie it does not move, and only serves to calculate interest rates. (Pavlát, Záškodný, 2012) The currency swaps are agreements to exchange interest payments repeatedly denominated in two different currencies. The contract is a fixed amount of future payments, the term and interest payment period. (Záškodný, Pavlát, Budík, 2007) IV. REFERAT BASIC DEVELOPMENT AND DESCRIPTION OF THE SELECTED FINANCIAL DERIVATIVE The Franfurkt Exchange (die Börse Franfurkt) I chose the swap with the name db x-trackers II EURO Inflation Swap 5 year TRI ETF. Db x-trackers II - Euro Inflation Swap 5 Year Total Return Index ETF is a stock market trading fund. Are traded in Luxembourg. Investment objective is to track the performance of German bank Deutsche Bank Euro Inflation Swap, what will be the total return index. 104

(Pavlát, Záškodný, 2012) Types of options Call option is the right to buy an agreed amount of securities at an agreed price (the strike price - exercise price) for a specified period piece.

4 Here are details on the above swap. See: After another view is given a three-year development swap. See: 105

5 Tab. 1 Here we can see the development in the last 50 days. Trading Day Date Rate Trading Day Date Rate , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,3 This chart is captured Gaussian curve. For the past 50 days, the course evolved from EURO EURO ,8 114,6 114,4 114, ,8 113,6 113,4 113, Development swaps for 50 days Celkem REFERENCES [1] DVOŘÁK, P., Bankovnictví pro bankéře a klienty (Banking for bankers and clients), Praha: Linde, 2005, ISBN X [2] ZÁŠKODNÝ P., PAVLÁT V., BUDÍK J., Finanční deriváty a jejich oceňování (Financial derivatives and their valuation), Praha: VŠFS, 2007, ISBN [3] PAVLÁT V., ZÁŠKODNÝ P., Od finančních derivátů k opčnímu hedgingu (From financial derivatives the optional hedging), Praha: Curriculum, 2012, ISBN [4] 106

21.9.2012 114,57 9. 20.8.2012 114,39 34. 24.9.2012 114,31 10. 21.8.2012 114,3 35. 25.9.2012 114,19 11. 22.8.2012 114,21 36. 26.9.2012 114,02 12. 23.8.2012 114,07 37. 27.9.2012 114,13 13. 24.8.2012 114,02 38.

OPTIONS MARKETS AND VALUATIONS (CHAPTERS 16 & 17)

OPTIONS MARKETS AND VALUATIONS (CHAPTERS 16 & 17) WHAT ARE OPTIONS? Derivative securities whose values are derived from the values of the underlying securities. Stock options quotations from WSJ. A call