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Interest Rates Derivatives Products An Overview Moscow Interbank Currency Exchange

liquid capital __________________________________. Interest Rates Derivatives Products An Overview Moscow Interbank Currency Exchange 21 November 2006. Summary. Liquid Capital Market’s - who we are and what we do Our markets Our specialities Options market making

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Interest Rates Derivatives Products An Overview Moscow Interbank Currency Exchange

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  1. liquid capital__________________________________ Interest Rates Derivatives Products An Overview Moscow Interbank Currency Exchange 21 November 2006

  2. Summary • Liquid Capital Market’s - who we are and what we do • Our markets • Our specialities • Options market making • A view from the trading desk • How do we provide liquidity • Futures trading • A word on pricing • Basic strategies • What makes a market? • Product development as an integrated process • A fine balancing act • MOSIBOR / MOSPRIME: key considerations • Futures contracts: what market structure? • The virtuous circle: liquidity breeds liquidity – how do you build it and maintain it

  3. liquid capital__________________________________ • Liquid Capital - who we are and what we do • Our markets • Our specialities

  4. A short introduction • Liquid Capital Marketsleading Market Maker and liquidity provider on the main European and Asian equityandfixed incomeproducts • Liquid Capital Securities offers an independentglobal executionbrokerage service for futures and options to an institutional client base spanning more than 16 countries

  5. Who we are • We are thefirst port of call for brokers with institutional business • We tradelargevolume

  6. What do we think • Profitable trading is a function of:

  7. What do we think • Speedandaccuracy • Research, knowledgeand insight

  8. What do we think • Webelieve passionatelyin:

  9. What do we think • Building relationshipsbased on trust

  10. Why are we different • We are able to absorb moretrades in larger volume therefore we can make narrow spreads even in difficult market conditions

  11. Why are we different • We controlvolume and therefore keep our prices competitive

  12. Why are we different • We are able to be the first to act to the changes in risk

  13. Why are we different • We commit to stand by our prices

  14. Why are we different • We understandthe interplay between technology and our markets and products

  15. Our specialities – Liquid Capital Markets • Options

  16. Our specialities – Liquid Capital Markets • Puremarket making

  17. Our specialities – Liquid Capital Markets • Volatility

  18. Our specialities – Liquid Capital Markets • Risk management

  19. Our Markets London • Single stock options • All component stocks of Dax 30 • Nokia AG • Interest rate options • Eurex Euro-BUND • Eurex Euro-BOBL • Eurex Euro-Schatz • Euronext LIFFE Euribor • Euronext LIFFE Short Sterling • Equity Index options • FTSE 100 • DAX 30 • EuroStoxx 50 • AEX Sydney • Asian Index Product • KOSPI options • KOSPI futures • NIKKEI options • NIKKEI futures (NK225) • JGB (Japanese Government Bond) • XJO (options on ASX 200) • AP (futures on Australian Share Price Index – SFE)  • Australian Single Stocks • National Australia Bank (NAB) • Telstra Corp (TLS) • BHP Billiton Ltd (BHP) • Rio Tinto (RIO) • Woodside Petroleum (WPL) • Woolworths (WOW) • Commonwealth Bank (CBA) • News Corporation (NWS/NWSLV)

  20. Our specialities – Liquid Capital Securities • Best execution

  21. Our specialities – Liquid Capital Securities • Price discovery

  22. Our specialities – Liquid Capital Securities • Specific product expertise

  23. Our specialities – Liquid Capital Securities • Coverage of futures and options worldwideand across asset classes

  24. Our specialities – Liquid Capital Securities • Access to quotes from Liquid Capital Markets

  25. Our specialities – Liquid Capital Securities • Analysis and research

  26. Summary • Options market making • A view from the trading desk • How do we provide liquidity

  27. A view from the trading desk – A day in the life… • 6:30 am: trading team gets in • 6:35 am: catch-up with news and review of book marks and quote sheets • 6:55 am: coffee and gents break • 6:59 am: last checks

  28. A view from the trading desk – A day in the life… • 7:00 am: hell breaks loose!

  29. A view from the trading desk – A day in the life… • 6:00 pm: market closes - worldreturns to itsnormal state

  30. Who is the Market Maker? • He is not a car dealer • He is looking for fair market equilibrium

  31. Who is the Market Maker? • With his pricing he ads transparency to the market • For a market maker it’s all about demand and supply

  32. The bottom line • Trading options is a very demanding job. You are supposed to: • Deal with the unknown • Make split-second decision

  33. The bottom line • Keep tight spreads • Keep the market happy • Keep your sales staff happy

  34. The bottom line • Keep your risk manager happy • Keep your boss happy • Keep the money coming in

  35. How we do it • Continuous two-way prices • Strict delta, vega and theta limits • Each position is dynamically hedged

  36. How we do it • Initial hedge via futures then we lock in the value of the option via a combination of spreads • The natural order flow is sufficient to absorb most of the hedge activity

  37. How we do it • Tightness of spreads heavily dependant on size • We watch out for directional players

  38. How we do it • We pay attention to “distressed options” i.e. options that have moved uncharacteristically away from fair value

  39. How we do it • We watch out for spreads that can turn very quickly close to maturity if near to at-the-money strike prices

  40. Interest Rates Options General hedging categories

  41. A typical trade • Market participants withdifferent aims • Speculatorforecasts a rate hike • He enters aprobability-basedtrade on anexpectation

  42. A typical trade • Hedger: wants to hedge exposure against rate hike • He wants to eliminate the risk of an expectation

  43. A typical trade • What do they do: • Speculator - buys ladder • Hedger - buys call spread

  44. A typical trade – In practice • Euribor cash rate: 3.50 % • Euribor March 07 Future: 96.09 (implied rate 3.91) • Indicative option prices Ask Bid • March 07 Euribor 96.000 call 0.11 0.12 • March 07 Euribor 96.250 call 0.015 0.020 • March 07 Euribor 96.500 call 0.050 0.070 • March 07 Euribor 96.750 call 0.000 0.001

  45. A typical trade – In practice • Speculatorbuys ladder: • Buys1 March 07 Euribor 96.250 call • Sells1 March 07 Euribor 96.500 call • Sells1 March 07 Euribor 96.750 call

  46. A typical trade – In practice • Hedger sell call spreads • Buys 1 March 07 Euribor 96.250 call • Sells 1 March 07 Euribor 96.000 call

  47. A typical trade – In practice • LCM: • Sells 2 March 07 Euribor 96.250 call • Buys 1 March 07 Euribor 96.200 call • Buys 1 March 07 Euribor 96.500 call • Buys 1 March 07 Euribor 96.750 call

  48. Considerations • Nopullto par butdrift • Mean reversionof volatilityandrates

  49. Considerations • Price options off an underlying future or fwd instrument • Use implied volatility

  50. Summary • Futures trading • A word on pricing • Basic strategies

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