Risk Management Basics
- Derivatives Basics
- Put-Call Parity
- Forwards vs Futures
- Spot Rate
- Forward Rate Formula
- Cash Settlement vs Physical Settlement
- Backwardation vs Contango
- Residual Risk
- Best Futures Books
- Futures vs Options
- What are Options in Finance?
- Exercise Price (Strike Price)
- In the Money
- Options Trading Strategies
- Call Options vs Put Options
- Options vs Warrants
- Writing Call Options
- Writing Put Options
- Gamma of an Option
- Options Trading Books
- International Option Exchanges
- Interest Rate Derivatives
- Interest Rate Swap
- Swap Rate
- Random vs Systematic ErrorÂ
- Equity Strategies
- Swaps in Finance
- Embedded Derivatives
- Commodity Derivatives
- Commodity Risk Management
- Managed Futures Strategy
- Top 7 Best Books on Derivatives
- Structured Finance Jobs
- Commodities Trading Books
- Best Commodities Books
- Fixed Income
- Equity Research vs Credit Research - Know the difference!
- Credit Analysis | What Credit Analyst Look for? 5 C's | Ratios
- Yield Curve Slope, Theory, Charts, Analysis (Complete Guide)
- Bond Pricing
- Coupon Bond
- Coupon Bond Formula
- Zero Coupon Bond
- Duration Formula
- Coupon Rate Formula
- Carrying Value of Bond
- Sinking Fund Formula
- Coupon Rate of a Bond
- Convertible Securities
- What are Treasury Bills?
- Repurchase Agreement
- Treasury Bills vs Bonds
- Coupon vs Yield
- Coupon Rate vs Interest Rate
- Credit Rating Process | A Complete Beginner's Guide
- Asset Backed Securities (RMBS, CMBS, CDOs)
- Loss Given Default - LGD | Examples, Formula, Calculation
- Top 7 Best Fixed Income Books
- ABS and MBS Index | Complete Beginner's Guide
- Top 10 Best Treasury Management Book
- Top 10 Best Credit Research Books
- Convexity of a Bond | Formula | Duration | Calculation
- Payment in Kind Bond | PIK Definition | Interest | Example
- Subordination Debt | Meaning | Example | Types | Risks
- Top 10 Best Books - Bonds Market, Bond Trading, Bond Investing
- Bonds vs Debentures
- Secured vs Unsecured Loan
- Bills of Exchange vs Promissory Note
- Bills of Exchange | Meaning | Examples | Top Features
- Promissory Notes
- Secured Loans
- Unsecured Loans
- Subordinated Debt
- Fallen Angel
- Bond Equivalent Yield Formula
- Junior Tranche
- Credit Analyst Interview Questions and Answers
- Debt Covenants | Bond Covenant Examples | Positive & Negative
- Credit Analyst Career
- Negative Covenants (Restrictive)
- Sinking Fund
- Bond Sinking Fund
- Negotiable Instruments
- Credit Spread
- Bond Pricing Formula
- Risk Management Careers
- Complete Beginner's Guide to CRM Exam
- How to Become a Quantitative Financial Analyst
- Risk Management Certifications and Salary
- Financial Engineering Career Guide: Program, Jobs, Salary
- Quantitative Analyst Salary | Skills | Trends | Top Employers
- Certificate in Quantitative Finance (CQF) Exam Guide
- Relative Risk Reduction Formula
International Option Exchanges – Option exchanges are primarily responsible for providing a location and framework for the trading of standardized options contracts. It is the physical or virtual marketplace for the trading of options. Very often such options are traded on an exchange along with futures and other derivatives. Such option exchanges manage their trading in a similar manner as a stock exchange handles its bonds and stocks.
Some of the popular International Option Exchanges are:
- #1 – Chicago Board Options Exchange (CBOE)
- #2 – Boston Options Exchange
- #3 – Montreal Stock Exchange
- #4 – Eurex Exchange
- #5 – NYSE Arca
- #6 – International Securities Exchange (ISE)
#1 – Chicago Board Options Exchange (CBOE)
Established in 1973, the CBOE is an international option exchange which concentrates on options contract for individual equities, interest rates and other indexes. It is the world’s largest options market and includes majority of the options traded. It is also considered a market leader in development of new financial products and technological innovation especially with electronic trading.
Trading on this exchange is executed by through their Hybrid system enabling the customers to trade – either electronically or the erstwhile Open Outcry method. This method is a traditional one involving shouting and use of hand signals to transfer information especially about buy and sell orders. Most of the trades are executed electronically which constitutes a very large portion of their business though some of the large and complex institutional orders requiring the skill of the floor brokers are executed with the open outcry method. This is to gain potential price movement.
The CBOE designed their volatility index for creating volatility products. VIX is the ticker symbol for the CBOE Volatility Index. It shows the market’s expectation of 30 day volatility. It is composed using the implied volatilities for a wide range of S&P 500 index options. Such volatility is calculated from both call and put options and used as a measure of market risk.
The movements of the VIX significantly depend on market reactions. For instance on June 13, 2016, the VIX climbed in excess of 23% closing at a high of 20.97 which indicated its highest level in over a time period of 90 days. The spike in the VIX occurred due to the global sell-off of the US equity trades. This was an indication to the investors around the globe that there was uncertainty in the market and thus decided to take the gains or realise the losses which caused a greater aggregate equity supply and reduced demand and in turn increasing market volatility.
This exchange is also very popular for allowing the investors to practice their trades before they can be placed so their individual strategies can be tested without risks. Some of the key features of their virtual trading platforms are:
- Virtual Trade Stocks, Options, Spreads, Straddles and Covered call trades (also, see Options Trading)
- Experimentation with advanced order strategies like Triggers and One-cancels-other (OCO)
- Availing the quotes at any time from the any of the screens using the integrated quote window.
- Analysis of the performance by making a download of the existing positions.
- Live chart support availability for regular guidance at any point
#2 – Boston Options Exchange
Also known as BOX Options Exchange it is an automated exchange owned and operated by TMX group which is a Public financial services company operating out of Canada. As equity options market, it provides services of matching electronic orders to the traders and stockbrokers.
This exchange offers options derivatives on around 1500 different securities. It generates orders which are completely tradable and also offers multiple competing market makers. It also provides SOLA which is a popular trading platform which matches or improves prices of options contracts and gives responses to orders in less than 20 milliseconds.
This exchange was the first one to offer movement of the prices to the traders through a process called as PIP (Price Improvement Period). The investor is required to have a broker who is willing and able to offer a facilitation trade – a trade in which broker guarantees the first penny of the movement in the price. It is to be noted that only investors whose brokers offer this service can have access to the PIP.
A key feature of the BOX market is the PIP auction which is a patented automated trading mechanism permitting the brokers to seek and improve executable client orders. The participant executing agency orders as Order Flow Providers (OFP’s) and desiring to improve the client’s price by taking the opposite side as Principal signal. This intent to the market is placed with the help of a special order message submitted to the BOX trading exchange, market makers on the class as well as other trading participants can then compete for their orders by offering a better price. At the end of a very short period, the client side of the trade is matched with the best available prices.
#3 – Montreal Stock Exchange
It is a derivatives exchange located in Montreal (Canada) which trades in Futures contracts and options on equities, indices, currencies, ETF’s, Interest rates and Energy stocks. It is also known as MX (Bourse de Montréal, formerly Montreal Stock Exchange (MSE)).
The equity options trading on this exchange covers most of the larger Canada traded firms but is not as broad-based as the US options markets. The interest rate derivatives cover the short-term acceptances of the bankers which include the overnight rate till the 3-month rate and 2 and 10 year Canadian Government Bonds.
The 3 most attractive individual products of the exchange are:
- S&P Canada 60 Index Futures (SXF)
- 3 month Canadian Bankers’ Acceptance Futures (BAX)
- 10 year Government of Canada Bond futures (CGB)
In 2007, Montreal added 30 year Government bonds. It also introduced a new futures product based on the performance of FTSE Emerging markets in 2014. The exchange also introduced a licensing agreement for the exchange and also the Canadian Derivatives Clearing Corporation (CDCC) for offering the trading and clearing of Canadian Dollar swap futures and options.
The MX Clearing House and the CDCC provide central counterparty clearing services to its participants. It holds the top investment rating and a very established reputation. The CDCC has also completed regulatory rule changes allowing the clearing house to offer risk management services in partnership with the OTC market.
The Market Data services of the MX manage the sale and distribution of market data. It also certifies the vendors on board and establishes internal and external distribution and subscription fee policies for real-time and delayed market information. The market data is available in the following forms:
- Real Time/Immediate basis
- Delayed basis of minimum 15 minutes
- End of Day Summary basis
#4 – Eurex Exchange
It is an international exchange which is prominent in trading of European based derivatives and its largest European Options and Futures Markets. It is located in Eschborn which is located near Frankfurt (Germany). This exchange deals in a wide variety of products ranging from Swiss and German debt instruments, European stocks and various other stock indexes. All the transactions executed on this exchange are cleared through the Eurex Clearing which operates as a Central Counterparty (CCP) for multiple asset class clearing of the above-mentioned products as well as the OTC products.
This exchange is ranked as the world’s third largest derivatives exchange by volume of contracts and has 9 worldwide branch offices.
The open outcry style of trading was a preferred method during the 1990’s and this exchange was one of the first to offer a fully electronic trading platform in comparison to other traditional platforms. It had introduced the T7 trading architecture which is a reliable and robust trading system establishing a connection between buyers and sellers across 35 countries. This also led to the speedier execution of trade without personal interaction of the parties with a capacity to trade more than 7 million contracts per day.
Eurex has a low cost and open electronic access system providing an integrated and automated joint Clearing House. Their listed futures covers large number of international benchmark products such as the most liquid fixed income markets around the globe. Some of the products offered by this exchange are:
- Interest Rate Derivatives (Euro Bond Futures)
- Equity Derivatives (Equity Options and Single Stock Futures based on European, US or Brazilian holdings)
- Equity Index Derivatives
- Equity Index Dividend derivatives
- Volatility Index Derivatives
- ETF Derivatives
- Credit Derivatives
- Commodity Derivatives
- Inflation & Property Derivatives
- Weather Derivatives
Eurex Bonds is an ECN (Electronic Communications Network) for purpose of wholesale trading especially in fixed income securities and Treasury discount papers. The trading of these Eurex bonds provides a direct link between the futures market and cash market enabling electronic basis trading with the help of a central order book.
Eurex Repo is a separate segment in the electronic trading solution for Repos. This segment is one of the leading electronic repo market providers and operates the Swiss Franc and Euro Repo Markets. It offers the entire value chain from Trading till Clearing & Settlement.
The participation in the Eurex Repo Market and Eurex Bonds is generally open to all the banks and financial service providers. These participants are subject to their country of domicile and the financial market supervisory authority for trading purposes. For private investors, Eurex repo is an interbank market and hence trading facility is not available.
#5 – NYSE Arca
This is a popular international stock exchange for trading of stocks and options owned by the International Exchange with its headquarters in Chicago. It was initially known as the Archipelago Exchange. The 2006 Merger of the Archipelago Holdings and the NYSE formed a new Parent Company or holding company known as the NYSE Group. This was a publicly traded, profit oriented organization combining traditional open outcry method with the electronic trading to form a hybrid system. Thus, NYSE Arca comprises NYSE Arca Equities for the trading of exchange-listed equity securities and the NYSE Arca options for the trading of equity options.
The NYSA Arca options offer a trading platform which blends a traditional open outcry trading floor with electronic trading technology, offering to trade in options contracts on Domestic stocks, American Depository Receipts (ADRs), broad-based industry and sector indices and also exchange-traded products (ETPs).
NYSE Arca Options offers a time-price priority trading model and an anonymous, flat and open market structure. The exchange operates a maker/taker pricing model, charging a fee for liquidity-removing trades and providing a rebate for liquidity-adding transactions. Trades are guaranteed, centrally cleared and margined by the Options Clearing Corporation (OCC). Their liquidity fee/rebate structure is similar to other electronic communication networks whereby charges for removing liquidity from their books is $3 per 1000 shares and addition of liquidity is $2 for every 1000 shares.
#6 – International Securities Exchange (ISE)
This is a wholly owned subsidiary of American multinational financial services corporation NASDAQ, Inc. It was acquired in 2016 for $1.1billion becoming a publicly traded company. It is also a member of the Options Clearing Corporation (OCC) and the Options Industry Council (OIC). It was launched as the initial fully electronic options exchange in the US. It developed a unique market structure for advanced screen-based trading. It also offers equity and index options including proprietary index products as well as FX options based on foreign currency pairs. ISE also offers market data tools designed for sophisticated investors seeking information on investor sentiment, volatility and other data for options. The ISE operates 3 US options exchanges namely:
- ISE Gemini
- ISE Mercury