Financial Derivatives - Forward Contracts

In a Forward Contract,
both the seller and the purchaser are
obligated to trade a security or other asset
at a specified date in the future.
The price paid for the security or
asset may be agreed upon at the time
the contract is entered into or
may be determined at delivery.

Forward Contracts
generally are traded OTC.

Financial Derivatives - Options

Options

The purchaser of an Option has rights
(but not obligations) to buy or sell the asset
during a given time for a specified price
(the "Strike" price). An Option to buy is
known as a "Call," and an Option to sell
is called a "Put. "

The seller of a Call Option is obligated to
sell the asset to the party that purchased the
Option. The seller of a Put Option is obligated to
buy the asset.

In a “Covered” Option, the seller
of the Option already owns the asset.
In a “Naked” Option, the seller does not own the asset

Options are traded on organized exchanges and OTC.

Common Financial Derivatives

• Options

• Forward Contracts

• Futures

• Stripped Mortgage-Backed Securities

• Structured Notes

• Swaps

• Rights of Use

• Combined

• Hedge Funds

Repayment of Financial Derivatives

In creating a financial derivative, the means for, basis
of, and rate of payment are specified.

Payment may be in currency, securities, a physical
entity such as gold or silver, an agricultural product
such as wheat or pork, a transitory commodity such as
communication bandwidth or energy.

The amount of payment may be tied to movement of
interest rates, stock indexes, or foreign currency.

Financial derivatives also may involve leveraging, with
significant percentages of the money involved being
borrowed. Leveraging thus acts to multiply (favorably
or unfavorably) impacts on total payment obligations
of the parties to the derivative instrument.

Definition of Financial Derivatives

A financial derivative is a contract between two (or more)
parties where payment is based on (i.e., "derived" from)
some agreed-upon benchmark.

Since a financial derivative can be created by means of a
mutual agreement, the types of derivative products are
limited only by imagination and so there is no definitive
list of derivative products.

Some common financial derivatives, however, are
described later.

More generic is the concept of “hedge funds” which use
financial derivatives as their most important tool for risk
management.

Structured Settlements, Security, Legislation, Clean break

SUMMARY


1. Structured Settlement

Security : Yes
Legislation : Exists
Clean break : Yes

2. Compulsory Structured
Settlement, RPI+2%

Security : Yes
Legislation : Court rules ?
Clean break : Yes

3. Income award without
review

Security : Yes, but framework required
Legislation : Small Step
Clean break : Yes

4. Income award with
review

Security : Yes, but framework required
Legislation : Required
Clean break : No

5. Indemnity award (with
review)

Security : Yes, but framework required
Legislation : Required
Clean break : No

Structured Settlements - The Motion

The needs of victims and society would
be better served by courts making
income or benefit awards. This would
be more effective than awarding lump
sums.

Structured Settlements - Requirements

Focus on needs and risks

Social and political understanding

No vested interests

Legal reform

Security and reserving framework

Informed debate

Catalyst - LCD consultation

Costs

Lump sums

Win or lose in court following offer

Income award - capitalise income

Review, no clean break, no winner

Court or statutory framework

Income/Indemnity Awards

Insurance policies

General insurance

Reassurance with life office?

Security - insurers, others

Special fund, government guarantee?

Supervision

Special class