CURRENT DEVELOPMENTS

& INNOVATIONS IN
INTERNATIONAL FINANCIAL
INSTRUMENTS
PRESENTED BY
Shrabani, Diana,
Nigamananda
is the creation of
the new or
the re-arranging
of the old in a
new way
 CATASTROPHE BOND

High-yield ,floating rate bonds

Issuers : Insurance & Reinsurance companies
Transfer risks from sponsor to investors
Issuer's obligation to pay is completely
forgiven or deferred if triggered
Triggers linked to major natural catastrophes
Prominent in the aftermath of hurricane
Andrew
Issued for time 1st time by AIG in 1999
 CREDIT DEFAULT SWAPS
A swap designed to transfer the credit
exposure of fixed income products between
parties.
Protection buyer of a credit swap receives
credit protection.
Protection seller takes the risk of default.
CDS market increased tremendously starting
in 2003
 A
(BUYER)

CR
ED SW
IT A P
DS

DE
ON

FA
T
UL

UL
SB

FA

T
DE
UE

OF
ISS

B
RIS

C
(SELLER)
(CORPORATE)
CHOOSER OPTIONS

An option where the investor has

the opportunity to choose whether
the option is a put or call.
Has a specified decision time
 More expensive due to flexibility
of choice.
CONTRACT FOR DIFFERENCE
A contract between two parties speculating on
the movement of an asset price.
Parties exchange the difference in the entry &
exit price of the asset.
No actual buying & selling.
If the difference is positive, the seller pays the
buyer. If it is negative, the buyer is the one
who loses money.
OTC traded
 EXCHANGE TRADED FUNDS

A security that tracks an index. 

ETFs are listed & traded in the stock exchages.
ETFs experience price changes throughout the
day as they are bought and sold.
Purchases and redemptions of the creation
units generally are in kind.
 SPDRs or "Spiders” introduced in January
1993 was the largest ETF in the world.
BENEFITS TYPES OF ETFS

 Buying and selling Index ETFs

flexibility Commodity ETFs
 Diversification Bond ETFs
 Transparency  Currency ETFs
 Low cost Gold ETFs
 LADDER OPTIONS

An option that locks-in

gains once the underlying
reaches predetermined
price levels or "rungs,"
guaranteeing some profit
even if the underlying
security falls back below
these levels before the
option expires. 
• Underlying Price : Rs.20
• Strike Price: Rs.22
• Predetermined price "rungs" : Rs. 25 - 30.
• If the price goes beyond Rs. 25 but below
Rs. 30 or falls below Rs.25
• Holder would be guaranteed at least a profit :
Rs. 3 (25 - 22)
 TARGET MARKET
Risk averse investors

 ADVANTAGES
Less risky as profits is locked
No need to constantly watch the underlying market
levels

 DISADVANTAGE
More expensive than a normal option
 WEATHER DERIVATIVES 
Used by organizations or individuals to reduce
risk associated with adverse or unexpected
weather conditions
Underlying asset : rain/temperature/snow
No direct value to price the weather derivative
First issued in July 1996
Chicago Mercantile Exchange introduced
trading in 1999
 GREEN BONDS
 Tax-exempt , fixed income bonds
 Issued by federally qualified
organizations and/or municipalities
 For the development of
environmentally friendly business
ventures.
 Amendment of Brownfield
Demonstration Program for
Qualified Green Building and
Sustainable Design Projects - 2004
 ELIGIBILTTY FOR ISSUE
The projects must cover at least 20 acres.
The project must also commit to
generating a pre-set portion of its own
power through the use of solar panels.
The project must meet strict standards on
the emissions of greenhouse gases.
 STRUCTURED NOTES
Hybrid Debt Instrument.

A debt obligation that contains an embedded

derivative component with features that adjust
the security's risk/return profile

Interest payment is linked to interest rate, stock,

stock index, commodity, or currency

 Aimed primarily at sophisticated investors.

 BRADY BONDS
• Bonds that are issued by the governments of
developing countries.
• Brady bonds are some of the most liquid
emerging market securities.
• They are named after former U.S. Treasury
Secretary Nicholas Brady, who sponsored the
effort to restructure emerging market debt
instruments.
 ZERO-COUPON CONVERTIBLE

A fixed income instrument

Combination of a zero-coupon bond and a
convertible bond
bond pays no interest and is issued at a
discount to par value
convertible into common stock of the issuer at
a certain conversion price.
 BERMUDA OPTIONS
Hybrid of American & European
option
Multiple exercise dates over the
option's lifetime
Generally OTC traded
Mostly used for forex & interest rate
contracts
Gets its name from Bermuda islands
Capital market preferred
stock
Fixed rate auction preferred
stock
Market auction preferred
stock
Digital Swaps
Compound options
Cross-hedging
Dual-currency bonds
• Vanilla options
• Asian options
• Basket options
• Barrier options
• Chooser options
• Cliquet options
• Compound options
• Contingent premium options
• Correlation options, 2-3 assets
• Digital options
• Ladder options
• Look back options
• Power options
• Volatility options
EXOTIC OPTIONS