Equity Perps

WHY DERIVATIVES?

Users

Underlying Risks

Derivative Types

Commodity manufacturers

Commodity price

Commodity derivatives

Multinational companies

Funding cost of foreign debt issuance and investments

Cross-currency swaps / FX forwards

Life insurers

Asset-liability management

Interest rate swaps or swaptions

Corporate treasurers

Funding cost before debt issuance

Forward rate agreements

Construction firms

The cost of raw materials

Commodity derivatives

Exporters

Foreign exchange (FX) fluctuations

Cross-currency swaps / FX forwards

Bank or loan portfolio managers

Credit risk of bond or loan exposures

Credit default swaps

Equity investors

Equity prices

Equity derivatives

Governments

Interest rate risk on new bond issuance

Interest rate swaps

https://why-derivatives.netlify.app/

Use cases

Chevron is exposed to market risks related to the price volatility of crude oil, refined products, natural gas, natural gas liquids, liquefied natural gas and refinery feedstocks. The company uses commodity derivatives to manage these exposures on a portion of its activity, including firm commitments and anticipated transactions for the purchase, sale and storage of crude oil, refined products, natural gas, natural gas liquids and feedstock for company refineries. The company also uses commodity derivatives for limited trading purposes16.

AT&T is exposed to market risks primarily from changes in interest rates and foreign currency exchange rates. The company uses derivatives, including IRS, interest rate locks, foreign currency exchange contracts and cross-currency swaps, to manage its debt structure and foreign exchange exposure. This enables the firm to manage its capital costs, control financial risks and maintain financial flexibility over the long term15.

Apple uses derivatives to partially offset its business exposure to foreign currency and interest rate risk on expected future cashflows, net investments in certain foreign subsidiaries, and certain existing assets and liabilities. The company enters into interest rate swaps (IRS) to manage interest rate risk on its outstanding term debt. IRS allow the company to effectively convert fixed-rate payments into floating-rate payments or floating-rate payments into fixed rate. The company also uses forwards, cross-currency swaps or other instruments to protect its foreign currency denominated term debt or marketable securities from fluctuations in foreign currency exchange rates14.

WHY BLOCKCHAIN-SETTLED PERPETUAL FUTURES?

No expiration, thus no need to roll over contracts. perpetual futures contract = perpetual swap

Swap

• A swap is a contract calling for an exchange of payments, on one or more dates, determined by the difference in two prices. • A swap provides a means to hedge a stream of risky payments. • A single-payment swap is the same thing as a cash-settled forward contract.

What is a clearinghouse?

Matches buy and sell orders Keeps track of members’ obligations and payments After matching the trades, becomes counterparty

Futures contract

Futures are legally binding agreements to buy or sell a standardized asset on a specific date or during a specific month. These contracts are standardized and traded on futures exchanges.

A futures contract is an exchange-traded, standardized, forward-like contract that is marked to the market daily. Futures contract can be used to establish a long (or short) position in the underlying commodity/asset.

Contract for differences (CFD)

Similar to a forward or futures contract that is cash settled. The amount of the cash settlement will represent the difference between the underlying asset's price agreed at the outset of the contract and its market price at the date of the settlement of the contract. CFDs can be long (that is, where the holder gains from a rise in the price of the underlying asset) or short (that, is where the holder gains from a fall in the price of the underlying asset).

However, unlike forwards and futures, CFDs are open-ended contracts with no fixed settlement date and can be closed out by the holder on demand. CFDs can offer exposure to a variety of financial assets, including single or multiple share indices, debt securities, commodities and currencies. When applied to shares, a CFD is an equity derivative under which the holder generally does not have voting rights or a call option over the underlying shares.

Spread-betting

1. Send USD to broker margin account 2. Open long spread bet at broker offer price 3. Broker locks required margin 4. Market moves up → broker credits cash P&L 5. Market moves down → broker debits cash P&L 6. Each night broker debits financing (long) or credits financing (short) 7. Broker applies dividend credit (long) or debit (short) 8. If margin falls below threshold broker demands top-up or auto-closes 9. Close position → broker settles P&L and releases remaining margin

auto-closes = auto de-leveraging?

CFDs vs. Blockchain Equity Perpetuals

Similar payoff structure: both are synthetic exposure to price movements without delivery of underlying asset.

Both cash-settled and
Both no expiry
Both replicate PnL = size × (price change) over time

Key difference is how price anchoring is enforced.

Futures vs. Forwards

Settled daily through mark-to-market process  low credit risk Highly liquid  easier to offset an existing position Highly standardized structure  harder to customize

Derivatives explained

ASSET CLASS

FLOW OF FUNDS

PRICING LOGIC

Close-out netting

Close-out netting is a process involving the termination of obligations under a contract with a defaulting party and subsequent combining of positive and negative replacement values into a single net payable or receivable. The diagram demonstrates payment obligations with and without close-out netting.

As close-out netting drastically reduces credit exposure between counterparties, it is the primary tool for mitigating credit risks associated with over-the-counter derivatives. Close-out netting is an essential component of the hedging activities of financial institutions and other users of derivatives.

Physical vs. Financial Settlement

An industrial producer, IP Inc., needs to buy 100,000 barrels of oil 1 year from today and 2 years from today. The forward prices for deliver in 1 year and 2 years are $20 and $21/barrel. The 1- and 2-year zero-coupon bond yields are 6% and 6.5%.

IP can guarantee the cost of buying oil for the next 2 years by entering into long forward contracts for 100,000 barrels in each of the next 2 years. The PV of this cost per barrel is:

Thus, IP could pay an oil supplier $37.383, and the supplier would commit to delivering one barrel in each of the next two years.

Physical settlement

Financial settlement

The oil buyer, IP, pays the swap counterparty the difference between $20.483 and the spot price, and the oil buyer then buys oil at the spot price.

If the difference between $20.483 and the spot price is negative, then the swap counterparty pays the buyer.

Feature

Equity Swap

Total Return Swap (TRS)

CFD

Target User

Institutional

Retail + Professional

Underlying Asset

Equity index or basket

Any return-generating asset (stocks, index, bond portfolio, etc.)

Stocks, indices, forex, crypto, commodities

Dividends & Gains

Usually equity price return only

Includes dividends + capital gains

Reflected in price, not paid directly

Leverage

Not common

Possible, but structured

Built-in, broker-defined

Contract Form

OTC, bilateral

OTC, broker-standardized

Use Case

Hedging, passive exposure

Synthetic ownership, balance sheet optimization

Trading, speculation, short-term views

Settlement

Periodic cash flows

Open-ended; exit anytime

Feature

CFDs

Equity Swaps

Target User

Retail traders and professionals

Institutions only (banks, funds, corporates)

Underlying Assets

Stocks, indices, forex, commodities, crypto

Usually indices or custom equity baskets

Leverage

Available, broker-defined

Not typical, exposure usually unleveraged

Use Case

Trading, speculation, short-term positioning

Synthetic exposure, hedging, tax optimization

Settlement

Open-ended; gain/loss realized at close

Periodic cash flows exchanged based on contract terms

Contract Form

Standardized by broker, OTC

Fully customized bilateral OTC agreement

Execution & Access

Direct from trading platforms, fast entry/exit

Requires negotiation, legal framework, counterparty agreement

Market Familiarity

Easy to start, platform-based execution

Requires legal/compliance infrastructure and knowledge of swap mechanics

Novation

Novation = P2P bilateral transfers?

For pensions

For electricity generation

DTCC

Source

ETF Replication

Characteristics of Physical ETFs and Synthetic ETFs

Physical ETFs

Synthetic ETFs

Underlying Holdings

Securities of the Index

Swaps and Collateral

Transparency

Transparent

Historically Low

Counterparty Risk

Limited

Existent (higher than physical ETFs)

Costs

Transactions Costs Management Fees

Swap Costs Management Fees

The unfunded model

Fully funded

Centrally-cleared derivatives

COUNTERPARTIES

End user – the reporting entity hedging its risk Swap execution facility – the trading system used to provide pre-trade information (i.e., bid and offer prices) and the mechanism for executing swap transactions Swap dealer – the market maker in swaps that regularly enters into swaps with counterparties Clearing member – a member firm of a clearing house and a derivative exchange