Barclays is the most prominent financial services providers according to the global perspective. This report critically analyses and discusses the usage and benefits of derivatives which is used in the company. The company has been involved in the credit cards, investment management services, investment banking, retail and commercial banking and wealth management. The operations of the Barclays Group have been spread all over the world especially in European countries, United States, and African Nations.
The key functioning associated with Barclays is London, United Kingdom as well as employs concerning about 144,200 people. Barclays strategic managements is to focus and obtain noble progress by expanding the base of their business and showing the growth in the market and fragments which is are mounting quickly. Barclays is focusing on their five managerial principles which are client focus, winning together, pioneering, customer and best people and trust.
Derivatives are financial market tools, where the values is been derived from the values of basic assets or keys of asset values. The assets and indexes involved are generally interest rates, foreign currency, commodities or equities. A derivative security is a contract between two parties for doing the transaction of the basic assets on future for some mutually agreed price. And that price will be used to identify the derivatives price. The main reasons of using the derivatives are for Hedging and Speculations. The trading of derivatives happens either in exchange markets or in Over-the-Counter (OTC).
All most all the companies will be focusing on hedging rather than speculation to reduce the avoidable risks and through the transfer of risk away from the hedgers who are unwilling to allow them and towards parties who are willing to assume the risk for the payment of a premium. Therefore the derivatives which used for the hedging will help to structure it properly. The derivative instruments is used to manage the Barclays own exposure to fluctuations in the interest rates, forex rates and also commodity and equity prices being percentage of its asset as well as legal responsibility managing routines. And hence the derivatives will assist you to have the efficient part regarding danger between your investors in the economic system.
Speculation is the other reason for using the derivatives but it is high risk factor where both parties will be on different extremes like one will say that it will go up where the other party will say it will go down. It is so risky because if it goes wrong it will be a heavy loss and further to this it is not well regulated.
Different Types of Derivatives
As mentioned derivatives is used towards the forward contracts, forward rate agreements, futures, swaps, options and hybrid products. A futures contract is one type of derivative instrument and the others are option contracts, swap agreements, forward contracts and warrants. These are the basic types of the derivatives. There are other types of derivatives as well which is used in different investment categories like currencies, interest rates, commodities, equities, bonds, treasury bills and cash. Derivatives can be formulated on anything like asset, equity or debt.
Future Contracts
A futures contract is a legally binding commitment to deliver at a future date, or take delivery of, a given quantity of a commodity, or a financial instrument, at an agreed price. The contract is standardised in all respects, except with regard to price and terms of delivery. Standardisation of contracts allows interchange ability with all other contracts of the same delivery period. This allows buyers and sellers to offset or liquidate any of their open positions with an equal and opposite transaction of a futures contract. (Slate L.J. in SCF Finance v. Masri). The long and short positions are very important in the future contracts. The asset buying party is considered as the long position and the asset selling party is taking short position. The asset buying party termed as the long position holder is a derivative trader who enters to the contract on the expectation that the asset price will increase.
Forward Contracts
The future contract and forward contract are very similar to each other where the forward contracts will be trading in the OTC markets. There is no general standard for the forward contract; therefore it will vary from contract to contract.
Where, 'N' is the number of months forward.
There are some major forward contracts like forward rate agreement and the repurchase agreements. The forward price is having different expiration for the maturity. Once the spot price will be lesser compared to the forwards price then the currency named since forward premium if not it is really is known as forward discount.
Options
An option is defines to purchase a contract for valuable consideration or to sell the property upon condition that the other party shall within the stipulated time bind himself to perform the terms of the offer embodied in the contract (Griffith C.J. in Goldsborough, Mort & Co. Ltd v. Quinn). Option means the right to buy or sell not an obligation. The option holder is having the complete right to do the trade or not of the assets.
Option contract allow the holder to purchase the commodity or financial tool at unwavering price are discussed to as CALL options. PUT options will allow the holder to sell the commodity or financial instrument at a specified price. are referred to as "put" options. The option premium is mentioned as the option price and time value.
Swaps
An interest rate swap is an agreement between two parties by which each agrees to pay the other on a specified date or dates an amount calculated by reference to the interest which would have accrued over a given period on the same notional principal sum assuming different rates of interest are payable in each case (Woolf L.J. in Hazell). The Barclays Group will buy and sell the financial tools which can be traded by using swaps, together with interest rate swaps, future contracts and options. The shareholders will provide the daily margin with the cash or other security at the exchange and looks for the final settlement. They will also buy and sell the financial instruments which are traded over the stand, rather than on a recognized exchange. A regular record is employed as an expert agreement, along together using personal deal confirmation.
There are significant changes to the trading and guidelines for derivatives and partakers in the derivatives markets. Different types of derivatives are traded in the over-the-counter (OTC) markets on the swap execution ability and centrally cleared. Partakers in these markets are to be registered mandatory with the US Commodity Futures Trading Commission (CFTC) as 'swap dealers' or 'major swap participants'. Barclays Bank PLC is subjected to these requirements.
Hedge accounting
Derivatives are utilized to hedge interest rate, exchange rate, commodity, as well as equity analysis and also analysis for the retail value linked to the particular non-trading's the location the place that the derivatives tend to be for that risk management, whenever trades satisfy their own standards, the particular holder applies reasonable benefit and cash circulation hedge data processing or perhaps hedging with the purchase throughout overseas transactions. When a financial instrument is made for the hedging, the Group will implement documents formally about the relationship involving the hedging device as its risk management goals. The Barclays is furthermore files its evaluation, both at hedge derivatives which can be used in hedging purchases. They have the strategy of taking responsibility of various hedging transactions. Financial instruments are popular in order to be able for you to help hedge numerous risks. Securing is actually attained with the exchange associated with risk out of the respondents who are unwilling to bear all of these as well as toward events who are willing to tackle the risk for your transaction of a premium. In this regard, types assistance to achieve the efficient part of chance in among different investors inside economic system.
Foreign exchange derivatives
The actual Barclays team's principal exchange rate associated agreements are forwards forex contracts, foreign forex swaps and options. Forwards foreign currency deals are the contracts to trade a particular quantity of foreign currency, usually on a future arranged fee. A currency exchange means the exchange regarding equivalent quantity of foreign stock markets and also retaining any guarantee in order to be able for you to help transfer the eye occasionally till or perhaps unless of course the main quantity is re-exchanged about the future. Foreign forex options give the choice to the buyer to buy or perhaps market a set array of currency at a quantified exchange rate in or perhaps prior to another time.
Interest rate derivatives
Barclays is focussing on interest rate derivatives and the main types under swaps, schedule swaps, forward price agreements, floors and swaps. The interest rate exchange can be agreement created on the list of parties to exchange the actual fixed and suspended price by periodic instalments. A few of the deals blend interest rate as well as foreign currency replacing, which may be or cannot swap the principal amounts. The foundation change is yet another kind of interest rate exchange, the location the place that the floating prices tend to be dependent reference indices. And the price arrangement means that the event confirms the next pay out associated with decided price along with a future interest rate, applied to a conception main sum.
Credit derivatives
Barclays is focussing on interest rate types as well as the main types under interest rate swaps, schedule swaps, forward price agreements, lids, floors and swaps. The interest rate exchange can be an agreement created on the list of parties to exchange the actual fixed and suspended price by periodic instalments. A few of the deals blend interest rate as well as foreign currency replacing, which may be or cannot swap the principal amounts. The foundation change is yet another kind of interest rate exchange, the location the place that the floating prices tend to be dependent reference indices. And the ahead price arrangement means that the events confirm the next pay out associated with decided price along with a future interest rate applied to a conception main sum.
Equity derivatives
Barclays base of the equity associated agreements are usually collateral change, index change and alternatives which includes warrants. The collateral swap is the big deal having a couple of celebrations to change the particular routine instalments exactly in which holder make payment on repaired or flying interest along with other paying their turn associated with share. The equity choice supplies the customer with all to purchase or sell the particular stock or stock market index at specific value on or even just ahead of specific future date. The particular Barclays team includes a robust placement inside fund-linked types, becoming trades as well as choices which include mutual funds, hedge resources, spiders and multi-asset investment domain stock portfolios.
Commodity derivatives
The Barclays principal commodity related derivative deals tend to be swaps, options, ahead and commodity. The primary commodities transacted are base metals, precious metals, gas and also oil-related goods, power and natural gas.
Barclays Group Annual Report 2010
Conclusion
Derivative financial asset increases in the mark to market positions in interest rate and foreign exchange derivatives due to movements in forward interest rate curves and volatility in the foreign exchange market. The maximum length of time that the actual hedging experiences of variableness in future cash flows regarding forecast purchases, eliminating individuals to the actual payment associated with variable interest in current financial devices is fourteen years. This was partially offset by decreases in credit, equity and commodities derivatives due to reduced volatility. Depending on the overall kind analysis associated with Barclays, It is utilizing forward contract and also alternatives devices regarding the risk by the hedging method and doesn't utilizing speculation. In the present circumstances the actual derivative devices are experiencing a key part and it's also straight showing throughout organisations profits.
