Patrick Boyle

These classes are all based on the book Trading and Pricing Financial Derivatives, available on Amazon at this link. https://amzn.to/2WIoAL0
Check out our website http://www.onfinance.org/

Follow Patrick on twitter here: https://twitter.com/PatrickEBoyle

This is the fifth video in our series on pricing options. The whole series is collected as a playlist here: https://www.youtube.com/watch?v=LHaftRA2N8A&list=PLHC72UlhAthDq-s_jRepKDrsaeGDU3PaJ

If you are new to options pricing and binomial trees it might make sense to watch some of the other videos first.

Binomial Trees and American Options
American options can be exercised anytime up to maturity, as opposed to European options which can only be exercised at maturity. Binomial trees can be used to price American options with the only modification needed is to evaluate at each node as to whether there is more value associated with exercising or holding the option to expiration. The highest of these two values is used in calculating the option value.

In the two-step American binomial tree valuation shown in this video, we are using the same example as in our last video but with the option now American. In this case, at T1 it would be optimal to early-exercise. Thus the valuation at the first down node is in fact the early-exercise valuation, which is the intrinsic value at that node, as opposed to the valuation achieved from the risk-neutral valuation for fd. At time zero, the valuation of the derivative is based on fu as usual, but the fd value input into the formula for f is the early exercise cash flow.

To watch the video where we priced the same put option, but as a European option, click here. https://www.youtube.com/watch?v=nN4tOYVqf9o

Pricing American Options using the Binomial Tree Method
multi step binomial trees

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In Todays video we will learn all about Credit Derivatives including Asset Backed Securities (ABS) Credit Default Swaps (CDS) and Collateralized Debt Obligations (CDO's)

These classes are all based on the book Derivatives For The Trading Floor, available on Amazon at this link. https://amzn.to/3GdLi2s
Check out our website http://www.onfinance.org/

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What are Credit Derivatives?

In finance, a credit derivative refers to any one of "various instruments designed to separate and then transfer the credit risk" or the risk of an event of default of a corporate or sovereign borrower, transferring it to an entity other than the lender or debtholder.

An unfunded credit derivative is one where credit protection is bought and sold between bilateral counterparties without the protection seller having to put up money upfront or at any given time during the life of the deal unless an event of default occurs. Usually these contracts are traded pursuant to an International Swaps and Derivatives Association (ISDA) master agreement. Most credit derivatives of this sort are credit default swaps. If the credit derivative is entered into by a financial institution or a special purpose vehicle (SPV) and payments under the credit derivative are funded using securitization techniques, such that a debt obligation is issued by the financial institution or SPV to support these obligations, this is known as a funded credit derivative.

This synthetic securitization process has become increasingly popular over the last decade, with the simple versions of these structures being known as synthetic collateralized debt obligations (CDOs), credit-linked notes or single-tranche CDOs. In funded credit derivatives, transactions are often rated by rating agencies, which allows investors to take different slices of credit risk according to their risk appetite.

The market in credit derivatives started in 1993 after having been pioneered by J.P. Morgan. By 1996 there was around $40 billion of outstanding transactions, half of which involved the debt of developing countries.

Credit default products are the most commonly traded credit derivative products and include unfunded products such as credit default swaps and funded products such as collateralized debt obligations.

Credit market participants, regulators, and courts are increasingly using credit derivative pricing to help inform decisions about loan pricing, risk management, capital requirements, and legal liability. The ISDA reported in April 2007 that total notional amount on outstanding credit derivatives was $35.1 trillion with a gross market value of $948 billion.

Although the credit derivatives market is a global one, London has a market share of about 40%, with the rest of Europe having about 10%.

The main market participants are banks, hedge funds, insurance companies, pension funds, and other corporates.



















What is a credit derivative? Trading and Pricing Financial Derivatives

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In todays video we learn about Value at Risk (VaR) and how is it calculated?
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What Is Value at Risk (VaR)?
Value at risk (VaR) is a calculation that aims to quantify the level of financial risk within a firm, portfolio or position over a specific time frame. This metric is most commonly used by investment and commercial banks to determine the extent and occurrence ratio of potential losses in their institutional portfolios.

Risk managers use VaR to measure and control the level of risk exposure. One can apply VaR calculations to specific positions or whole portfolios or to measure firm-wide risk exposure.


VaR modeling aims to calculate the potential for loss in the portfolio being assessed and the probability of occurrence for the defined loss. One measures VaR by assessing the amount of potential loss, the probability of occurrence for the amount of loss, and the timeframe involved.

A VaR calculation based on data from a period of low volatility may understate the potential for risk events to occur and the magnitude of those events. Risk may be further understated using normal distribution probabilities, which rarely account for extreme or black-swan events.

The financial crisis of 2008 exposed many of the problems with VaR as relatively benign VaR calculations understated the potential occurrence of loss events posed by portfolios of subprime mortgages. Risk was underestimated, which resulted in extreme leverage ratios within subprime portfolios. As a result, the underestimations of occurrence and risk magnitude left institutions unable to cover billions of dollars in losses as subprime mortgage values collapsed.


Risk Management

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In the race to dominate generative AI, Big Tech firms haven’t just been building, they’ve been buying. But there’s something strange about most of the deals that they have struck. Companies like Meta, Microsoft, Amazon, Google, and Nvidia are embedding themselves deep within the AI ecosystem through strategic investments, exclusive partnerships, and talent acquisitions- with deals that stop just short of formal takeovers, but the economic impact of these deals it turns out – is indistinguishable from full control.

Drayton D'Silva Substack Article: https://enterprisevalue.substack.com/if-i-did-it

Patrick's Books:
Statistics For The Trading Floor: https://amzn.to/3eerLA0
Derivatives For The Trading Floor: https://amzn.to/3cjsyPF
Corporate Finance: https://amzn.to/3fn3rvC

Ways To Support The Channel
Patreon: https://www.patreon.com/PatrickBoyleOnFinance
Buy Me a Coffee: https://www.buymeacoffee.com/patrickboyle

Visit our website: https://www.onfinance.org
Follow Patrick on Twitter Here: https://bsky.app/profile/pboyle.bsky.social

Business Inquiries ➡️ [email protected]

Patrick Boyle On Finance Podcast:
Spotify: https://open.spotify.com/show/7uhrWlDvxzy9hLoW0EYf0b
Apple: https://podcasts.apple.com/us/podcast/patrick-boyle-on-finance/id1547740313
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What is a Derivatives Clearing House? What do they do?

These classes are all based on the book Trading and Pricing Financial Derivatives, available on Amazon at this link. https://amzn.to/2WIoAL0
Check out our website http://www.onfinance.org/

Follow Patrick on twitter here: https://twitter.com/PatrickEBoyle

After legally-binding trade between a buyer and a seller, the role of the clearing house is to centralize and standardize all of the steps leading up to the settlement of the transaction. The purpose is to reduce the cost, settlement risk and operational risk of clearing and settling multiple transactions among multiple parties.

In addition to the above services, central counterparty clearing (CCP) takes on counterparty risk by stepping in between the original buyer and seller of a financial contract, such as a derivative. The role of the CCP is to perform the obligations under the contract agreed between the two counterparties, thereby removing the counterparty risk the parties of the contract had to each other and replacing it with counterparty risk to a highly regulated central counterparty that specializes in managing and mitigating counterparty risk.

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Go to https://surfshark.com/boyle for 4 extra months of Surfshark

European markets rallied sharply this week as German borrowing costs soared after the country’s new leaders announced a historic deal to loosen its “debt brake” rule to boost spending on defense.

The interest rate on German government bonds saw their biggest daily increase since October 1998.

The Dax 30 index, which tracks the largest German companies, rose by 3.5% as stock prices also leapt in other European markets amid hopes that a massive boost in European spending on defense and infrastructure would kickstart the region’s lagging economy.

Patrick's Books:
Statistics For The Trading Floor: https://amzn.to/3eerLA0
Derivatives For The Trading Floor: https://amzn.to/3cjsyPF
Corporate Finance: https://amzn.to/3fn3rvC

Ways To Support The Channel
Patreon: https://www.patreon.com/PatrickBoyleOnFinance
Buy Me a Coffee: https://www.buymeacoffee.com/patrickboyle

Visit our website: https://www.onfinance.org
Follow Patrick on Twitter Here: https://bsky.app/profile/pboyle.bsky.social

Business Inquiries ➡️ [email protected]

Patrick Boyle On Finance Podcast:
Spotify: https://open.spotify.com/show/7uhrWlDvxzy9hLoW0EYf0b
Apple: https://podcasts.apple.com/us/podcast/patrick-boyle-on-finance/id1547740313
Google Podcasts: https://tinyurl.com/62862nve

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What are Financial Options?
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What are Financial Options?
Options are a financial derivative sold by an option writer or seller to an option buyer. They are typically purchased through a broker. The contract gives the buyer the right, but not the obligation, to buy (call option) or sell (put option) the underlying asset at an agreed-upon price during a certain period of time or on a specific date. The agreed upon price is called the strike price. American options can be exercised any time before the expiration date of the option, while European options can only be exercised on the expiration date (also known as exercise date). Exercising an option means utilizing the right to buy or the sell the underlying security.

What is a call option?
Call options provide the option buyer with the right to buy an underlying security at the strike price. The buyer of a call option is bullish and wants the price of the stock to go up. Conversely, the option seller (or writer) has to sell the underlying security to the option buyer, at the strike price, in the event that the stock's market price is above the strike price at expiration.

An option writer who sells a call option believes that the underlying stock's price will drop or stay the same relative to the option's strike price during the life of the option, as that is how they will reap maximum profit. The writer's maximum profit is the premium received when selling the option.

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In todays video we learn about Swaps.

These classes are all based on the book Trading and Pricing Financial Derivatives, available on Amazon at this link. https://amzn.to/2WIoAL0
Check out our website http://www.onfinance.org/

Follow Patrick on twitter here: https://twitter.com/PatrickEBoyle

What is a Swap?

A swap is a financial derivative in which two counterparties exchange cash flows of one party's financial instrument for those of the other party's financial instrument. For example, in the case of a swap involving two bonds, the two parties would be exchanging the periodic interest (coupon) payments associated with the bonds. With a swap the two counterparties agree to exchange one stream of cash flows against another stream. These streams are called the legs of the swap. The swap agreement defines the dates when the cash flows are to be paid and the way they are accrued and calculated. Usually at the time when the contract is initiated, at least one of these series of cash flows is determined by an uncertain variable such as a floating interest rate, foreign exchange rate, equity price, or commodity price.

The cash flows are calculated over a notional principal amount. Contrary to a future, a forward or an option, the notional amount is usually not exchanged between counterparties. Consequently, swaps can be in cash or collateral.

Swaps can be used to hedge certain risks such as interest rate risk, or to speculate on changes in the expected direction of underlying prices.

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For decades, the American consumer has powered not just the world's biggest economy but the entire global economy. According to the World Bank – Americans make up around one third of global consumer spending but are only 4% of the global population. We should only be so surprised by this – Americans are amongst the most productive workers in the world and thus are amongst the best paid – the fact that they are both busy and highly paid makes them naturally big consumers.

In today's video we look at how tariffs, the end of the de minimis exemption and lower consumer conference may affect the American consumer.

Patrick's Books:
Statistics For The Trading Floor: https://amzn.to/3eerLA0
Derivatives For The Trading Floor: https://amzn.to/3cjsyPF
Corporate Finance: https://amzn.to/3fn3rvC

Ways To Support The Channel
Patreon: https://www.patreon.com/PatrickBoyleOnFinance
Buy Me a Coffee: https://www.buymeacoffee.com/patrickboyle

Visit our website: https://www.onfinance.org
Follow Patrick on Twitter Here: https://bsky.app/profile/pboyle.bsky.social

Business Inquiries ➡️ [email protected]

Patrick Boyle On Finance Podcast:
Spotify: https://open.spotify.com/show/7uhrWlDvxzy9hLoW0EYf0b
Apple: https://podcasts.apple.com/us/podcast/patrick-boyle-on-finance/id1547740313
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Today we learn about what a warrant is in finance and what a warrant is in debt.

These classes are all based on the book Trading and Pricing Financial Derivatives, available on Amazon at this link. https://amzn.to/2WIoAL0
Check out our website http://www.onfinance.org/

Follow Patrick on twitter here: https://twitter.com/PatrickEBoyle

Patreon Page: https://www.patreon.com/PatrickBoyleOnFinance

In finance, a warrant is a security that gives the owner the right but not the obligation to buy the underlying stock of the issuing company at a fixed price called exercise price until the expiry date.

Warrants and options are similar in that the two contractual financial instruments allow the holder special rights to buy securities. Both are discretionary and have expiration dates. The word warrant simply means to "endow with the right", which is only slightly different from the meaning of option.

Warrants are sometimes attached to bonds or preferred stock as a sweetener, allowing the issuer to pay lower interest rates or dividends. They can be used to enhance the yield of the bond and make them more attractive to potential buyers. Warrants can also be used in private equity deals. Frequently, these warrants are detachable and can be sold independently of the bond or stock.
In the case of warrants issued with preferred stocks, stockholders may need to detach and sell the warrant before they can receive dividend payments. Thus, it is sometimes beneficial to detach and sell a warrant as soon as possible so the investor can earn dividends.

Warrants are actively traded in some financial markets such as German Stock Exchange (Deutsche Börse) and Hong Kong.

Warrants are very similar to call options. For instance, many warrants confer the same rights as equity options and warrants often can be traded in secondary markets like options. However, there also are several key differences between warrants and equity options:

Warrants are issued by private parties, typically the corporation on which a warrant is based, rather than a public options exchange.
Warrants issued by the company itself are dilutive. When the warrant issued by the company is exercised, the company issues new shares of stock, so the number of outstanding shares increases. When a call option is exercised, the owner of the call option receives an existing share from an assigned call writer (except in the case of employee stock options, where new shares are created and issued by the company upon exercise). Unlike common stock shares outstanding, warrants do not have voting rights.

Warrants are considered over the counter instruments and thus are usually only traded by financial institutions with the capacity to settle and clear these types of transactions.
A warrant's lifetime is measured in years (as long as 15 years), while options are typically measured in months. Even LEAPS (long-term equity anticipation securities), the longest stock options available, tend to expire in two or three years. Upon expiration, the warrants are worthless unless the price of the common stock is greater than the exercise price.
Warrants are not standardized like exchange-listed options. While investors can write stock options on the ASX (or CBOE), they are not permitted to do so with ASX-listed warrants, since only companies can issue warrants and, while each option contract is over 1000 underlying ordinary shares (100 on CBOE), the number of warrants that must be exercised by the holder to buy the underlying asset depends on the conversion ratio set out in the offer documentation for the warrant issue.

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