What is the difference between financial forward, futures, swaps and option management market risks?

As far as the types of risks are concerned, there is nothing special about the risks involved in derivatives trading. It has all the basic risks that traditional financial products should have, and it is recognized that it has not produced other new risks. However, due to leverage, virtuality, futurity, contingency and other factors, the risk degree of derivatives trading has risen to an unprecedented height compared with traditional financial products. The risk of derivative products trading mainly presents the following characteristics: the huge risk, the sudden risk event, the concentration of risk, the complexity of risk and the chain of risk. The confirmation, prevention and management of derivatives trading risks have always been the concern of banking practitioners and managers. Therefore, starting from this issue, I will explain how to manage and avoid the five basic risks: market risk, credit risk, liquidity risk, operational risk and legal risk from a micro perspective.

Market risks are different.

Risk events in financial derivatives are usually the result of the interaction of multiple risk factors. But among them, market risk has a fundamental position. The greater the market risk, the more easily the normal capital flow of the counterparty will be affected, and the greater the possibility that it will not be able to pay normally and have liquidity difficulties. When the counterparty has liquidity difficulties, in order to cope with the current payment, sometimes the counterparty is forced to sell assets or borrow at high interest rate, which further worsens its financial situation, weakens its ability to pay, and further increases the possibility of non-performance and credit risk. So caught in a vicious circle, the result will inevitably be a total outbreak of various risks, triggering a financial crisis and even an economic and social crisis.

The market risks of different kinds of derivatives transactions are different. Forward trading, because the transaction price is locked in advance, makes both parties lose the opportunity to benefit, and there is no possibility of loss due to market price changes. Therefore, there is basically no market risk for forward products. Futures trading and swap trading have market risks for both parties. Different changes in the price of basic financial assets will directly affect the profits and losses of both parties to the transaction. The market risk of option trading is unilateral, which is mainly borne by the seller of option contract.

In the recent incident in which CAO suffered a huge loss of $550 million, the loss of futures was about $654.38 billion at most, and a larger part of the loss was caused by selling a large number of call options. Call option means that investors have the right to buy the underlying assets from the seller at a predetermined price within the agreed period. Option buyers can choose whether to exercise the option contract according to the market situation. Even if they give up, they will lose the royalty at most. Once the price of the underlying asset rises, the option seller will bear unlimited risks. Because of this, internationally, only the most reputable and powerful institutions such as Morgan, Goldman Sachs and other big investment banks and other big market makers will sell options. Cao misjudged the oil price market trend and sold a large number of call options on aviation kerosene, but did not hedge the risk through reverse operation at the same time, so the huge loss is also reasonable.

In addition, the market risk of derivatives is different for different trading methods. For example, for hedgers, the market risk is relatively small and tends to zero, because the purpose of hedging in derivatives trading is to avoid market risk; For speculators, the market risk is relatively large, because speculators are risk-averse, and the purpose of their trading is to earn profits by taking market risks, so once mistakes occur, the losses will be very heavy. Allison bet on Japan's economic recovery, and the result of his wrong bet was to bring down Bahrain Bank. When Chen Jiulin misjudged the oil price, he speculated on aviation oil futures and options, and his price was to bring down a listed company.

Hedging or position reorganization

Back to the derivatives trading of commercial banks, at present, all domestic commercial banks have launched their own foreign exchange wealth management products, and all commercial banks have contracts to sell implied derivatives, and then they have leveled off in the international derivative financial market. The risk of this kind of valet business should be borne by the customer, and the bank basically does not bear any risk. But we have also seen the advertisement that "the annualized income of personal foreign exchange financing is above 10%". The essence of this commitment is that commercial banks leave market risks to themselves. If the market trend is inconsistent with expectations and the promised rate of return cannot be achieved, then commercial banks will face the possibility of huge losses.

The management of market risk in derivatives trading refers to "self-protection" of the market risk that exceeds the total risk that the trading subject can bear. Usually, risk averse people will take any possible measures to transfer market risk to risk preference in the market. For example, the bank has a temporarily unused Japanese yen deposit, which can be converted into US dollars and invested in the money market to obtain interest income (the interest of US dollars is higher than that of Japanese yen). At the same time, in order to prevent the dollar exchange rate from falling in a certain period of time, so that banks suffer losses, they can sell dollar futures (dollar shorts) in the form of yen in the forward foreign exchange market. If the dollar is really weak, banks will inevitably suffer losses when they exchange dollars for yen in the spot market, but this can be achieved by taking long positions in dollars with the same amount and duration in the futures market to make up for the losses in spot trading.

In a word, the price fluctuation of derivative basic assets will make derivative transactions full of risks, so it is necessary to manage their market risks. On the other hand, the use of derivatives provides a possible means for risk management and can play an important role in the overall risk management of market participants. Generally speaking, commercial banks involved in derivatives trading should also establish effective market risk management procedures, including market risk identification, avoidance methods and effective control, supervision and reporting systems.