128-591: The Grand Opera House was a theatre located at 119 North Clark Street in Chicago , Illinois. Established by Chicago impresario John A. Hamlin, the theatre originally opened as the Coliseum in 1875 and was later rebranded as Hamlin's Theatre in 1878. Initially a disreputable variety theatre catering to lowbrow tastes, the theatre was completely reinvented after an extensive and expensive remodel and reconstruction led by architect Dankmar Adler . It reopened in 1880 as
256-425: A long position , and the party agreeing to sell the asset in the future assumes a short position . The price agreed upon is called the delivery price , which is equal to the forward price at the time the contract is entered into. The price of the underlying instrument, in whatever form, is paid before control of the instrument changes. This is one of the many forms of buy/sell orders where the time and date of trade
384-452: A CDO might issue the following tranches in order of safeness: Senior AAA (sometimes known as "super senior"); Junior AAA; AA; A; BBB; Residual. Separate special-purpose entities —rather than the parent investment bank —issue the CDOs and pay interest to investors. As CDOs developed, some sponsors repackaged tranches into yet another iteration called " CDO-Squared " or the "CDOs of CDOs". In
512-403: A Democrat, was elected in 1955, in the era of machine politics . In 1956, the city conducted its last major expansion when it annexed the land under O'Hare airport, including a small portion of DuPage County. By the 1960s, white residents in several neighborhoods left the city for the suburban areas – in many American cities, a process known as white flight – as Blacks continued to move beyond
640-548: A Non-Agency MBS; in the United States they may be issued by structures set up by government-sponsored enterprises like Fannie Mae or Freddie Mac , or they can be "private-label", issued by structures set up by investment banks. The structure of the MBS may be known as "pass-through", where the interest and principal payments from the borrower or homebuyer pass through it to the MBS holder, or it may be more complex, made up of
768-483: A certain price is a " put option ". Both are commonly traded, but for clarity, the call option is more frequently discussed. Options valuation is a topic of ongoing research in academic and practical finance. In basic terms, the value of an option is commonly decomposed into two parts: Although options valuation has been studied since the 19th century, the contemporary approach is based on the Black–Scholes model , which
896-666: A city in 1837 near a portage between the Great Lakes and the Mississippi River watershed . It grew rapidly in the mid-19th century. In 1871, the Great Chicago Fire destroyed several square miles and left more than 100,000 homeless, but Chicago's population continued to grow. Chicago made noted contributions to urban planning and architecture , such as the Chicago School , the development of
1024-429: A corporation borrows a large sum of money at a specific interest rate. The interest rate on the loan reprices every six months. The corporation is concerned that the rate of interest may be much higher in six months. The corporation could buy a forward rate agreement (FRA), which is a contract to pay a fixed rate of interest six months after purchases on a notional amount of money. If the interest rate after six months
1152-430: A derivative contract to speculate on the value of the underlying asset. Speculators look to buy an asset in the future at a low price according to a derivative contract when the future market price is high, or to sell an asset in the future at a high price according to a derivative contract when the future market price is less. Speculative trading in derivatives gained a great deal of notoriety in 1995 when Nick Leeson ,
1280-539: A derivative in history, attested to by Aristotle , is thought to be a contract transaction of olives , entered into by ancient Greek philosopher Thales , who made a profit in the exchange. However, Aristotle did not define this arrangement as a derivative but as a monopoly (Aristotle's Politics, Book I, Chapter XI). Bucket shops , outlawed in 1936 in the US, are a more recent historical example. Derivatives are contracts between two parties that specify conditions (especially
1408-403: A firm's capital structure , e.g., bonds and stock, can also be considered derivatives, more precisely options, with the underlying being the firm's assets, but this is unusual outside of technical contexts. From the economic point of view, financial derivatives are cash flows that are conditioned stochastically and discounted to present value. The market risk inherent in the underlying asset
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#17327870691281536-404: A forward is not traded on an exchange and thus does not have the interim partial payments due to marking to market. Nor is the contract standardized, as on the exchange. Unlike an option , both parties of a futures contract must fulfill the contract on the delivery date. The seller delivers the underlying asset to the buyer, or, if it is a cash-settled futures contract, then cash is transferred from
1664-495: A heart attack soon after. Washington was succeeded by 6th ward alderperson Eugene Sawyer , who was elected by the Chicago City Council and served until a special election. Richard M. Daley , son of Richard J. Daley, was elected in 1989. His accomplishments included improvements to parks and creating incentives for sustainable development , as well as closing Meigs Field in the middle of the night and destroying
1792-665: A model for the new field of social work . During the 1870s and 1880s, Chicago attained national stature as the leader in the movement to improve public health. City laws and later, state laws that upgraded standards for the medical profession and fought urban epidemics of cholera , smallpox , and yellow fever were both passed and enforced. These laws became templates for public health reform in other cities and states. The city established many large, well-landscaped municipal parks , which also included public sanitation facilities. The chief advocate for improving public health in Chicago
1920-479: A new grade with the use of jackscrews for raising buildings. While elevating Chicago, and at first improving the city's health, the untreated sewage and industrial waste now flowed into the Chicago River , and subsequently into Lake Michigan , polluting the city's primary freshwater source. The city responded by tunneling two miles (3.2 km) out into Lake Michigan to newly built water cribs . In 1900,
2048-483: A number of purposes, including insuring against price movements ( hedging ), increasing exposure to price movements for speculation , or getting access to otherwise hard-to-trade assets or markets. Some of the more common derivatives include forwards , futures , options , swaps , and variations of these such as synthetic collateralized debt obligations and credit default swaps . Most derivatives are traded over-the-counter (off-exchange) or on an exchange such as
2176-452: A particular type of that security—one backed by consumer loans (example: "As a rule of thumb, securitization issues backed by mortgages are called MBS, and securitization issues backed by debt obligations are called CDO, [and] Securitization issues backed by consumer-backed products—car loans, consumer loans and credit cards, among others—are called ABS.) Originally developed for the corporate debt markets, over time CDOs evolved to encompass
2304-488: A pool of other MBSs. Other types of MBS include collateralized mortgage obligations (CMOs, often structured as real estate mortgage investment conduits) and collateralized debt obligations (CDOs). The shares of subprime MBSs issued by various structures, such as CMOs, are not identical but rather issued as tranches (French for "slices"), each with a different level of priority in the debt repayment stream, giving them different levels of risk and reward. Tranches—especially
2432-401: A single buyer and seller, one or both of which may be a dealer or market-maker. Options are part of a larger class of financial instruments known as derivative products or simply derivatives. A swap is a derivative in which two counterparties exchange cash flows of one party's financial instrument for those of the other party's financial instrument. The benefits in question depend on
2560-426: A specified strike price on or before a specified date . The seller has the corresponding obligation to fulfill the transaction—that is to sell or buy—if the buyer (owner) "exercises" the option. The buyer pays a premium to the seller for this right. An option that conveys to the owner the right to buy something at a certain price is a " call option "; an option that conveys the right of the owner to sell something at
2688-404: A specified amount of cash for a specified amount of wheat in the future. Both parties have reduced a future risk: for the wheat farmer, the uncertainty of the price, and for the miller, the availability of wheat. However, there is still the risk that no wheat will be available because of events unspecified by the contract, such as the weather, or that one party will renege on the contract. Although
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#17327870691282816-451: A specified future time at an amount agreed upon today, making it a type of derivative instrument. This is in contrast to a spot contract , which is an agreement to buy or sell an asset on its spot date, which may vary depending on the instrument, for example most of the FX contracts have Spot Date two business days from today. The party agreeing to buy the underlying asset in the future assumes
2944-488: A standardized contract between two parties to buy or sell a specified asset of standardized quantity and quality for a price agreed upon today (the futures price ) with delivery and payment occurring at a specified future date, the delivery date , making it a derivative product (i.e. a financial product that is derived from an underlying asset). The contracts are negotiated at a futures exchange , which acts as an intermediary between buyer and seller. The party agreeing to buy
3072-424: A third party, called a clearing house , insures a futures contract, not all derivatives are insured against counter-party risk. From another perspective, the farmer and the miller both reduce a risk and acquire a risk when they sign the futures contract: the farmer reduces the risk that the price of wheat will fall below the price specified in the contract and acquires the risk that the price of wheat will rise above
3200-458: A trader at Barings Bank , made poor and unauthorized investments in futures contracts. Through a combination of poor judgment, lack of oversight by the bank's management and regulators, and unfortunate events like the Kobe earthquake , Leeson incurred a $ 1.3 billion loss that bankrupted the centuries-old institution. Individuals and institutions may also look for arbitrage opportunities, as when
3328-504: A variety of reasons. In broad terms, there are two groups of derivative contracts, which are distinguished by the way they are traded in the market: Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps , forward rate agreements , exotic options – and other exotic derivatives – are almost always traded in this way. The OTC derivative market
3456-466: Is above the contract rate, the seller will pay the difference to the corporation, or FRA buyer. If the rate is lower, the corporation will pay the difference to the seller. The purchase of the FRA serves to reduce the uncertainty concerning the rate increase and stabilize earnings. Derivatives can be used to acquire risk, rather than to hedge against risk. Thus, some individuals and institutions will enter into
3584-410: Is attached to the financial derivative through contractual agreements and hence can be traded separately. The underlying asset does not have to be acquired. Derivatives therefore allow the breakup of ownership and participation in the market value of an asset. This also provides a considerable amount of freedom regarding the contract design. That contractual freedom allows derivative designers to modify
3712-407: Is known to botanists as Allium tricoccum and known more commonly as "ramps". The first known reference to the site of the current city of Chicago as " Checagou " was by Robert de LaSalle around 1679 in a memoir. Henri Joutel , in his journal of 1688, noted that the eponymous wild "garlic" grew profusely in the area. According to his diary of late September 1687: ... when we arrived at
3840-422: Is no central counter-party. Therefore, they are subject to counterparty risk , like an ordinary contract , since each counter-party relies on the other to perform. Exchange-traded derivatives (ETD) are those derivatives instruments that are traded via specialized derivatives exchanges or other exchanges. A derivatives exchange is a market where individuals trade standardized contracts that have been defined by
3968-435: Is no required reporting of transactions to a government agency. During the 2007–2008 financial crisis , the lack of transparency in this large market became a concern to regulators as it could pose a systemic risk . In March 2010, the [DTCC] Trade Information Warehouse announced it would give regulators greater access to its credit default swaps database. CDS data can be used by financial professionals , regulators, and
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4096-460: Is not paid back as a single payment to the bond holder at maturity but rather is paid along with the interest in each periodic payment (monthly, quarterly, etc.). This decrease in face value is measured by the MBS's "factor", the percentage of the original "face" that remains to be repaid. In finance , an option is a contract which gives the buyer (the owner) the right, but not the obligation, to buy or sell an underlying asset or instrument at
4224-403: Is not the same as the value date where the securities themselves are exchanged. The forward price of such a contract is commonly contrasted with the spot price , which is the price at which the asset changes hands on the spot date . The difference between the spot and the forward price is the forward premium or forward discount, generally considered in the form of a profit , or loss, by
4352-401: Is secured by a mortgage , or more commonly a collection ("pool") of sometimes hundreds of mortgages . The mortgages are sold to a group of individuals (a government agency or investment bank) that " securitizes ", or packages, the loans together into a security that can be sold to investors. The mortgages of an MBS may be residential or commercial , depending on whether it is an Agency MBS or
4480-441: Is the insurer (risk taker) for one type of risk, and the counter-party is the insurer (risk taker) for another type of risk. Hedging also occurs when an individual or institution buys an asset (such as a commodity, a bond that has coupon payments , a stock that pays dividends, and so on) and sells it using a futures contract. The individual or institution has access to the asset for a specified amount of time, and can then sell it in
4608-571: Is the largest market for derivatives, and is largely unregulated with respect to disclosure of information between the parties, since the OTC market is made up of banks and other highly sophisticated parties, such as hedge funds . Reporting of OTC amounts is difficult because trades can occur in private, without activity being visible on any exchanges According to the Bank for International Settlements , who first surveyed OTC derivatives in 1995, reported that
4736-401: The 2020 census , it is the third-most populous city in the United States after New York City and Los Angeles . As the seat of Cook County , the second-most populous county in the U.S., Chicago is the center of the Chicago metropolitan area , often colloquially called "Chicagoland" and home to 9.6 million residents. Located on the shore of Lake Michigan , Chicago was incorporated as
4864-479: The Black Belt . While home loan discriminatory redlining against blacks continued, the real estate industry practiced what became known as blockbusting , completely changing the racial composition of whole neighborhoods. Structural changes in industry, such as globalization and job outsourcing, caused heavy job losses for lower-skilled workers. At its peak during the 1960s, some 250,000 workers were employed in
4992-719: The Calumet River in the industrial far South Side—flow either entirely or partially through the city. Chicago's history and economy are closely tied to its proximity to Lake Michigan. While the Chicago River historically handled much of the region's waterborne cargo, today's huge lake freighters use the city's Lake Calumet Harbor on the South Side. The lake also provides another positive effect: moderating Chicago's climate, making waterfront neighborhoods slightly warmer in winter and cooler in summer. When Chicago
5120-588: The Chicago Mercantile Exchange , while most insurance contracts have developed into a separate industry. In the United States , after the 2007–2008 financial crisis , there has been increased pressure to move derivatives to trade on exchanges. Derivatives are one of the three main categories of financial instruments, the other two being equity (i.e., stocks or shares) and debt (i.e., bonds and mortgages ). The oldest example of
5248-485: The City Beautiful movement , and the steel-framed skyscraper . Chicago is an international hub for finance, culture , commerce, industry, education, technology, telecommunications, and transportation . It has the largest and most diverse finance derivatives market in the world, generating 20% of all volume in commodities and financial futures alone. O'Hare International Airport is routinely ranked among
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5376-540: The Great Lakes to connect to the Mississippi River. A flourishing economy brought residents from rural communities and immigrants from abroad. Manufacturing and retail and finance sectors became dominant, influencing the American economy . The Chicago Board of Trade (established 1848) listed the first-ever standardized "exchange-traded" forward contracts, which were called futures contracts . In
5504-542: The Jefferson Township , which now makes up most of Chicago's Northwest Side . The desire to join the city was driven by municipal services that the city could provide its residents. Chicago's flourishing economy attracted huge numbers of new immigrants from Europe and migrants from the Eastern United States . Of the total population in 1900, more than 77% were either foreign-born or born in
5632-511: The Miami , Sauk and Meskwaki peoples in this region. The first known permanent settler in Chicago was trader Jean Baptiste Point du Sable . Du Sable was of African descent, perhaps born in the French colony of Saint-Domingue (Haiti), and established the settlement in the 1780s. He is commonly known as the "Founder of Chicago." In 1795, following the victory of the new United States in
5760-592: The New Negro Movement , in art, literature, and music. Continuing racial tensions and violence, such as the Chicago race riot of 1919 , also occurred. The ratification of the 18th amendment to the Constitution in 1919 made the production and sale (including exportation) of alcoholic beverages illegal in the United States. This ushered in the beginning of what is known as the gangster era, a time that roughly spans from 1919 until 1933 when Prohibition
5888-836: The Northwest Indian War , an area that was to be part of Chicago was turned over to the U.S. for a military post by native tribes in accordance with the Treaty of Greenville . In 1803, the U.S. Army constructed Fort Dearborn , which was destroyed during the War of 1812 in the Battle of Fort Dearborn by the Potawatomi before being later rebuilt. After the War of 1812, the Ottawa , Ojibwe , and Potawatomi tribes ceded additional land to
6016-469: The University of Chicago , Northwestern University , and the University of Illinois Chicago , among other institutions of learning . Professional sports in Chicago include all major professional leagues , including two Major League Baseball teams. The name Chicago is derived from a French rendering of the indigenous Miami–Illinois word shikaakwa for a wild relative of the onion ; it
6144-698: The Washington and Jackson Parks. During World War I and the 1920s there was a major expansion in industry. The availability of jobs attracted African Americans from the Southern United States . Between 1910 and 1930, the African American population of Chicago increased dramatically, from 44,103 to 233,903. This Great Migration had an immense cultural impact, called the Chicago Black Renaissance , part of
6272-412: The spot value (i.e., the original value agreed upon, since any gain or loss has already been previously settled by marking to market). Upon marketing the strike price is often reached and creates much income for the "caller". A closely related contract is a forward contract . A forward is like a futures in that it specifies the exchange of goods for a specified price at a specified future date. However,
6400-528: The world's top six busiest airports by passenger traffic , and the region is also the nation's railroad hub. The Chicago area has one of the highest gross domestic products (GDP) of any urban region in the world, generating $ 689 billion in 2018. Chicago's economy is diverse , with no single industry employing more than 14% of the workforce. Chicago is a major destination for tourism , including visitors to its cultural institutions , and Lake Michigan beaches . Chicago's culture has contributed much to
6528-700: The " gross market value , which represent the cost of replacing all open contracts at the prevailing market prices, ... increased by 74% since 2004, to $ 11 trillion at the end of June 2007 (BIS 2007:24)." Positions in the OTC derivatives market increased to $ 516 trillion at the end of June 2007, 135% higher than the level recorded in 2004. The total outstanding notional amount is US$ 708 trillion (as of June 2011). Of this total notional amount, 67% are interest rate contracts , 8% are credit default swaps (CDS) , 9% are foreign exchange contracts, 2% are commodity contracts, 1% are equity contracts, and 12% are other. Because OTC derivatives are not traded on an exchange, there
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#17327870691286656-494: The 1800s, Chicago became the nation's railroad hub, and by 1910 over 20 railroads operated passenger service out of six different downtown terminals. In 1883, Chicago's railway managers needed a general time convention, so they developed the standardized system of North American time zones . This system for telling time spread throughout the continent. In 1893, Chicago hosted the World's Columbian Exposition on former marshland at
6784-477: The 1850s, Chicago gained national political prominence as the home of Senator Stephen Douglas , the champion of the Kansas–Nebraska Act and the "popular sovereignty" approach to the issue of the spread of slavery. These issues also helped propel another Illinoisan, Abraham Lincoln , to the national stage. Lincoln was nominated in Chicago for U.S. president at the 1860 Republican National Convention , which
6912-775: The 2007 merger of the Chicago Mercantile Exchange and the Chicago Board of Trade and the 2008 acquisition of the New York Mercantile Exchange ). According to BIS, the combined turnover in the world's derivatives exchanges totaled US$ 344 trillion during Q4 2005. By December 2007 the Bank for International Settlements reported that "derivatives traded on exchanges surged 27% to a record $ 681 trillion." Inverse exchange-traded funds (IETFs) and leveraged exchange-traded funds (LETFs) are two special types of exchange traded funds (ETFs) that are available to common traders and investors on major exchanges like
7040-448: The 2007-9 subprime mortgage crisis . A credit default swap ( CDS ) is a financial swap agreement that the seller of the CDS will compensate the buyer (the creditor of the reference loan) in the event of a loan default (by the debtor) or other credit event . The buyer of the CDS makes a series of payments (the CDS "fee" or "spread") to the seller and, in exchange, receives a payoff if
7168-781: The 57th mayor of Chicago. Chicago is located in northeastern Illinois on the southwestern shores of freshwater Lake Michigan. It is the principal city in the Chicago Metropolitan Area , situated in both the Midwestern United States and the Great Lakes region . The city rests on a continental divide at the site of the Chicago Portage, connecting the Mississippi River and the Great Lakes watersheds . In addition to it lying beside Lake Michigan, two rivers—the Chicago River in downtown and
7296-455: The Chicago River were devastated; by 1933 over 50% of industrial jobs in the city had been lost, and unemployment rates amongst blacks and Mexicans in the city were over 40%. The Republican political machine in Chicago was utterly destroyed by the economic crisis, and every mayor since 1931 has been a Democrat . From 1928 to 1933, the city witnessed a tax revolt, and the city was unable to meet payroll or provide relief efforts. The fiscal crisis
7424-489: The Grand Opera House; now under the management of Harry L. Hamlin who ran the theatre for the next 32 years under that name. Under his tenure the venue became a respectable theatre which featured mainly performances of light operas and musical comedies ; although some plays were also performed. In 1888 the well known painter and scenic designer Ernest Albert re-designed the interior of the opera house. In 1912
7552-535: The Mississippi River. In 1871, the Great Chicago Fire destroyed an area about 4 miles (6.4 km) long and 1-mile (1.6 km) wide, a large section of the city at the time. Much of the city, including railroads and stockyards , survived intact, and from the ruins of the previous wooden structures arose more modern constructions of steel and stone. These set a precedent for worldwide construction. During its rebuilding period, Chicago constructed
7680-472: The NYSE and Nasdaq. To maintain these products' net asset value , these funds' administrators must employ more sophisticated financial engineering methods than what's usually required for maintenance of traditional ETFs. These instruments must also be regularly rebalanced and re-indexed each day. Some of the common variants of derivative contracts are as follows: Some common examples of these derivatives are
7808-601: The Shubert family became the sole owners of the theatre, and it was once again named the Grand Opera House. It continued under this name into the early 1940s. The theatre was purchased by RKO Pictures and remodeled and reconstructed again; this time with the purpose of changing the theatre into a movie palace to showcase RKO's films. It reopened as the RKO Grand Theatre in 1942. The theatre closed in March 1958 and
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#17327870691287936-578: The South arrived in the city to work in the steel mills, railroads, and shipping yards. On December 2, 1942, physicist Enrico Fermi conducted the world's first controlled nuclear reaction at the University of Chicago as part of the top-secret Manhattan Project . This led to the creation of the atomic bomb by the United States, which it used in World War II in 1945. Mayor Richard J. Daley ,
8064-557: The United States in the 1816 Treaty of St. Louis . The Potawatomi were forcibly removed from their land after the 1833 Treaty of Chicago and sent west of the Mississippi River as part of the federal policy of Indian removal . On August 12, 1833, the Town of Chicago was organized with a population of about 200. Within seven years it grew to more than 6,000 people. On June 15, 1835, the first public land sales began with Edmund Dick Taylor as Receiver of Public Monies. The City of Chicago
8192-787: The United States of foreign parentage. Germans , Irish , Poles , Swedes , and Czechs made up nearly two-thirds of the foreign-born population (by 1900, whites were 98.1% of the city's population). Labor conflicts followed the industrial boom and the rapid expansion of the labor pool, including the Haymarket affair on May 4, 1886, and in 1894 the Pullman Strike . Anarchist and socialist groups played prominent roles in creating very large and highly organized labor actions. Concern for social problems among Chicago's immigrant poor led Jane Addams and Ellen Gates Starr to found Hull House in 1889. Programs that were developed there became
8320-422: The budget for total expenditure of the United States government during 2012 was $ 3.5 trillion, and the total current value of the U.S. stock market is an estimated $ 23 trillion. Meanwhile, the global annual Gross Domestic Product is about $ 65 trillion. At least for one type of derivative, credit default swaps (CDS), for which the inherent risk is considered high , the higher, nominal value remains relevant. It
8448-494: The cash collected by the CDO is insufficient to pay all of its investors, those in the lowest, most "junior" tranches suffer losses first. The last to lose payment from default are the safest, most senior tranches. Consequently, coupon payments (and interest rates) vary by tranche with the safest/most senior tranches paying the lowest and the lowest tranches paying the highest rates to compensate for higher default risk . As an example,
8576-565: The city include the central business district, called the Loop , and the North, South , and West Sides . The three sides of the city are represented on the Flag of Chicago by three horizontal white stripes. The North Side is the most-densely-populated residential section of the city, and many high-rises are located on this side of the city along the lakefront. The South Side is the largest section of
8704-545: The city was affected by a series of tenant rent strikes , which lead to the formation of the Chicago Tenants Protective association, passage of the Kessenger tenant laws, and of a heat ordinance that legally required flats to be kept above 68 °F during winter months by landlords. Chicago was the first American city to have a homosexual-rights organization. The organization, formed in 1924,
8832-415: The city's first African American woman mayor and its first openly LGBTQ mayor, was elected to succeed Emanuel as mayor in 2019. All three city-wide elective offices were held by women (and women of color) for the first time in Chicago history: in addition to Lightfoot, the city clerk was Anna Valencia and the city treasurer was Melissa Conyears-Ervin . On May 15, 2023, Brandon Johnson assumed office as
8960-424: The city's first female mayor, was elected. She was notable for temporarily moving into the crime-ridden Cabrini-Green housing project and for leading Chicago's school system out of a financial crisis. In 1983, Harold Washington became the first black mayor of Chicago. Washington's first term in office directed attention to poor and previously neglected minority neighborhoods. He was re‑elected in 1987 but died of
9088-489: The city, encompassing roughly 60% of the city's land area. The South Side contains most of the facilities of the Port of Chicago . Derivative (finance) In finance , a derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset , index , currency , or interest rate , and is often simply called the underlying . Derivatives can be used for
9216-527: The convention hall, with anti-war protesters, journalists and bystanders being beaten by police. Major construction projects, including the Sears Tower (now known as the Willis Tower , which in 1974 became the world's tallest building ), University of Illinois at Chicago , McCormick Place , and O'Hare International Airport , were undertaken during Richard J. Daley's tenure. In 1979, Jane Byrne ,
9344-458: The current buying price of an asset falls below the price specified in a futures contract to sell the asset. The true proportion of derivatives contracts used for hedging purposes is unknown, but it appears to be relatively small. Also, derivatives contracts account for only 3–6% of the median firms' total currency and interest rate exposure. Nonetheless, we know that many firms' derivatives activities have at least some speculative component for
9472-405: The dates, resulting values and definitions of the underlying variables, the parties' contractual obligations, and the notional amount ) under which payments are to be made between the parties. The assets include commodities , stocks , bonds , interest rates and currencies , but they can also be other derivatives, which adds another layer of complexity to proper valuation. The components of
9600-483: The district and forcing a shutdown of electrical power. The area was shut down for three days and some buildings did not reopen for weeks; losses were estimated at $ 1.95 billion. On February 23, 2011, Rahm Emanuel , a former White House Chief of Staff and member of the House of Representatives , won the mayoral election. Emanuel was sworn in as mayor on May 16, 2011, and won re-election in 2015. Lori Lightfoot ,
9728-520: The early 2000s, CDOs were generally diversified, but by 2006–2007—when the CDO market grew to hundreds of billions of dollars—this changed. CDO collateral became dominated not by loans, but by lower level ( BBB or A ) tranches recycled from other asset-backed securities, whose assets were usually non-prime mortgages. These CDOs have been called "the engine that powered the mortgage supply chain" for nonprime mortgages, and are credited with giving lenders greater incentive to make non-prime loans leading up to
9856-507: The exchange. A derivatives exchange acts as an intermediary to all related transactions, and takes initial margin from both sides of the trade to act as a guarantee. The world's largest derivatives exchanges (by number of transactions) are the Korea Exchange (which lists KOSPI Index Futures & Options), Eurex (which lists a wide range of European products such as interest rate & index products), and CME Group (made up of
9984-539: The fair was technological innovation over the century since Chicago's founding. During World War II , the city of Chicago alone produced more steel than the United Kingdom every year from 1939 – 1945, and more than Nazi Germany from 1943 – 1945. The Great Migration, which had been on pause due to the Depression, resumed at an even faster pace in the second wave , as hundreds of thousands of blacks from
10112-467: The following: A collateralized debt obligation ( CDO ) is a type of structured asset-backed security (ABS) . An "asset-backed security" is used as an umbrella term for a type of security backed by a pool of assets—including collateralized debt obligations and mortgage-backed securities (MBS) (Example: "The capital market in which asset-backed securities are issued and traded is composed of three main categories: ABS, MBS and CDOs". )—and sometimes for
10240-421: The future at a specified price according to the futures contract. Of course, this allows the individual or institution the benefit of holding the asset, while reducing the risk that the future selling price will deviate unexpectedly from the market's current assessment of the future value of the asset. Derivatives trading of this kind may serve the financial interests of certain particular businesses. For example,
10368-421: The futures exchange requires both parties to put up an initial amount of cash (performance bond), the margin . Margins, sometimes set as a percentage of the value of the futures contract, need to be proportionally maintained at all times during the life of the contract to underpin this mitigation because the price of the contract will vary in keeping with supply and demand and will change daily and thus one party or
10496-430: The futures trader who sustained a loss to the one who made a profit. To exit the commitment prior to the settlement date, the holder of a futures position can close out its contract obligations by taking the opposite position on another futures contract on the same asset and settlement date. The difference in futures prices is then a profit or loss. A mortgage-backed security ( MBS ) is an asset-backed security that
10624-678: The latter offers managers and investors a risky opportunity to increase profit, which may not be properly disclosed to stakeholders. Along with many other financial products and services, derivatives reform is an element of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010. The Act delegated many rule-making details of regulatory oversight to the Commodity Futures Trading Commission (CFTC) and those details are not finalized nor fully implemented as of late 2012. To give an idea of
10752-556: The loan (these are called "naked" CDSs). If there are more CDS contracts outstanding than bonds in existence, a protocol exists to hold a credit event auction ; the payment received is usually substantially less than the face value of the loan. Credit default swaps have existed since the early 1990s, and increased in use after 2003. By the end of 2007, the outstanding CDS amount was $ 62.2 trillion, falling to $ 26.3 trillion by mid-year 2010 but reportedly $ 25.5 trillion in early 2012. CDSs are not traded on an exchange and there
10880-503: The loan defaults. It was invented by Blythe Masters from JP Morgan in 1994. In the event of default the buyer of the CDS receives compensation (usually the face value of the loan), and the seller of the CDS takes possession of the defaulted loan. However, anyone with sufficient collateral to trade with a bank or hedge fund can purchase a CDS, even buyers who do not hold the loan instrument and who have no direct insurable interest in
11008-411: The lower-priority, higher-interest tranches—of an MBS are/were often further repackaged and resold as collaterized debt obligations. These subprime MBSs issued by investment banks were a major issue in the subprime mortgage crisis of 2006–2008 . The total face value of an MBS decreases over time, because like mortgages, and unlike bonds , and most other fixed-income securities, the principal in an MBS
11136-451: The lowest points are along the lake shore at 578 ft (176.2 m), while the highest point, at 672 ft (205 m), is the morainal ridge of Blue Island in the city's far south side. Lake Shore Drive runs adjacent to a large portion of Chicago's waterfront. Some of the parks along the waterfront include Lincoln Park , Grant Park , Burnham Park , and Jackson Park . There are 24 public beaches across 26 miles (42 km) of
11264-401: The market in which they trade (such as exchange-traded or over-the-counter ); and their pay-off profile. Derivatives may broadly be categorized as "lock" or "option" products. Lock products (such as swaps , futures , or forwards ) obligate the contractual parties to the terms over the life of the contract. Option products (such as interest rate swaps ) provide the buyer the right, but not
11392-409: The market value and the true credit risk faced by the parties involved. For example, in 2010, while the aggregate of OTC derivatives exceeded $ 600 trillion, the value of the market was estimated to be much lower, at $ 21 trillion. The credit-risk equivalent of the derivative contracts was estimated at $ 3.3 trillion. Still, even these scaled-down figures represent huge amounts of money. For perspective,
11520-674: The media to monitor how the market views credit risk of any entity on which a CDS is available, which can be compared to that provided by credit rating agencies . U.S. courts may soon be following suit. Most CDSs are documented using standard forms drafted by the International Swaps and Derivatives Association (ISDA), although there are many variants. In addition to the basic, single-name swaps, there are basket default swaps (BDSs), index CDSs, funded CDSs (also called credit-linked notes ), as well as loan-only credit default swaps (LCDS). In addition to corporations and governments,
11648-578: The modern era, but their origins trace back several centuries. One of the oldest derivatives is rice futures, which have been traded on the Dojima Rice Exchange since the eighteenth century. Derivatives are broadly categorized by the relationship between the underlying asset and the derivative (such as forward , option , swap ); the type of underlying asset (such as equity derivatives , foreign exchange derivatives , interest rate derivatives , commodity derivatives, or credit derivatives );
11776-443: The mortgage and mortgage-backed security (MBS) markets. Like other private-label securities backed by assets, a CDO can be thought of as a promise to pay investors in a prescribed sequence, based on the cash flow the CDO collects from the pool of bonds or other assets it owns. The CDO is "sliced" into "tranches" , which "catch" the cash flow of interest and principal payments in sequence based on seniority. If some loans default and
11904-425: The obligation to enter the contract under the terms specified. Derivatives can be used either for risk management (i.e. to " hedge " by providing offsetting compensation in case of an undesired event, a kind of "insurance") or for speculation (i.e. making a financial "bet"). This distinction is important because the former is a prudent aspect of operations and financial management for many firms across many industries;
12032-416: The option purchaser typically pays an up front premium. Just like for lock products, movements in the underlying asset will cause the option's intrinsic value to change over time while its time value deteriorates steadily until the contract expires. An important difference between a lock product is that, after the initial exchange, the option purchaser has no further liability to its counterparty; upon maturity,
12160-460: The other party's thus ensuring that the correct daily loss or profit is reflected in the respective account. If the margin account goes below a certain value set by the Exchange, then a margin call is made and the account owner must replenish the margin account. This process is known as "marking to market". Thus on the delivery date, the amount exchanged is not the specified price on the contract but
12288-440: The other will theoretically be making or losing money. To mitigate risk and the possibility of default by either party, the product is marked to market on a daily basis whereby the difference between the prior agreed-upon price and the actual daily futures price is settled on a daily basis. This is sometimes known as the variation margin where the futures exchange will draw money out of the losing party's margin account and put it into
12416-416: The outset because they provide specified protection ( intrinsic value ) over a given time period ( time value ). One common form of option product familiar to many consumers is insurance for homes and automobiles. The insured would pay more for a policy with greater liability protections (intrinsic value) and one that extends for a year rather than six months (time value). Because of the immediate option value,
12544-669: The participation in the performance of the underlying asset almost arbitrarily. Thus, the participation in the market value of the underlying can be effectively weaker, stronger (leverage effect), or implemented as inverse. Hence, specifically the market price risk of the underlying asset can be controlled in almost every situation. There are two groups of derivative contracts: the privately traded over-the-counter (OTC) derivatives such as swaps that do not go through an exchange or other intermediary, and exchange-traded derivatives (ETD) that are traded through specialized derivatives exchanges or other exchanges. Derivatives are more common in
12672-437: The parties do not exchange additional property securing the party at gain and the entire unrealized gain or loss builds up while the contract is open. However, being traded over the counter ( OTC ), forward contracts specification can be customized and may include mark-to-market and daily margin calls. Hence, a forward contract arrangement might call for the loss party to pledge collateral or additional collateral to better secure
12800-469: The parties. Based upon movements in the underlying asset over time, however, the value of the contract will fluctuate, and the derivative may be either an asset (i.e., " in the money ") or a liability (i.e., " out of the money ") at different points throughout its life. Importantly, either party is therefore exposed to the credit quality of its counterparty and is interested in protecting itself in an event of default . Option products have immediate value at
12928-399: The party at gain. In other words, the terms of the forward contract will determine the collateral calls based upon certain "trigger" events relevant to a particular counterparty such as among other things, credit ratings, value of assets under management or redemptions over a specific time frame (e.g., quarterly, annually). In finance , a 'futures contract' (more colloquially, futures ) is
13056-506: The present location of Jackson Park . The Exposition drew 27.5 million visitors, and is considered the most influential world's fair in history. The University of Chicago , formerly at another location, moved to the same South Side location in 1892. The term "midway" for a fair or carnival referred originally to the Midway Plaisance , a strip of park land that still runs through the University of Chicago campus and connects
13184-410: The price specified in the contract (thereby losing additional income that he could have earned). The miller, on the other hand, acquires the risk that the price of wheat will fall below the price specified in the contract (thereby paying more in the future than he otherwise would have) and reduces the risk that the price of wheat will rise above the price specified in the contract. In this sense, one party
13312-613: The problem of sewage contamination was largely resolved when the city completed a major engineering feat. It reversed the flow of the Chicago River so that the water flowed away from Lake Michigan rather than into it. This project began with the construction and improvement of the Illinois and Michigan Canal, and was completed with the Chicago Sanitary and Ship Canal that connects to the Illinois River , which flows into
13440-400: The purchaser will execute the option if it has positive value (i.e., if it is "in the money") or expire at no cost (other than to the initial premium) (i.e., if the option is "out of the money"). Derivatives allow risk related to the price of the underlying asset to be transferred from one party to another. For example, a wheat farmer and a miller could sign a futures contract to exchange
13568-610: The purchasing party. Forwards, like other derivative securities, can be used to hedge risk (typically currency or exchange rate risk), as a means of speculation , or to allow a party to take advantage of a quality of the underlying instrument which is time-sensitive. A closely related contract is a futures contract ; they differ in certain respects . Forward contracts are very similar to futures contracts, except they are not exchange-traded, or defined on standardized assets. Forwards also typically have no interim partial settlements or "true-ups" in margin requirements like futures—such that
13696-454: The reference entity can include a special-purpose vehicle issuing asset-backed securities . Some claim that derivatives such as CDS are potentially dangerous in that they combine priority in bankruptcy with a lack of transparency. A CDS can be unsecured (without collateral) and be at higher risk for a default. In finance, a forward contract or simply a forward is a non-standardized contract between two parties to buy or to sell an asset at
13824-593: The runways. After successfully running for re-election five times, and becoming Chicago's longest-serving mayor, Richard M. Daley declined to run for a seventh term. In 1992, a construction accident near the Kinzie Street Bridge produced a breach connecting the Chicago River to a tunnel below, which was part of an abandoned freight tunnel system extending throughout the downtown Loop district. The tunnels filled with 250 million US gallons (1,000,000 m ) of water, affecting buildings throughout
13952-615: The said place called "Chicagou" which, according to what we were able to learn of it, has taken this name because of the quantity of garlic which grows in the forests in this region. The city has had several nicknames throughout its history, such as the Windy City , Chi-Town, Second City, and City of the Big Shoulders. In the mid-18th century, the area was inhabited by the Potawatomi , an indigenous tribe who had succeeded
14080-653: The size of the derivative market, The Economist has reported that as of June 2011, the over-the-counter (OTC) derivatives market amounted to approximately $ 700 trillion, and the size of the market traded on exchanges totaled an additional $ 83 trillion. For the fourth quarter 2017 the European Securities Market Authority estimated the size of European derivatives market at a size of €660 trillion with 74 million outstanding contracts. However, these are "notional" values, and some economists say that these aggregated values greatly exaggerate
14208-587: The steel industry in Chicago, but the steel crisis of the 1970s and 1980s reduced this number to just 28,000 in 2015. In 1966, Martin Luther King Jr. and Albert Raby led the Chicago Freedom Movement , which culminated in agreements between Mayor Richard J. Daley and the movement leaders. Two years later, the city hosted the tumultuous 1968 Democratic National Convention , which featured physical confrontations both inside and outside
14336-538: The theatre was renamed George M. Cohan's Grand Opera House when George M. Cohan and Sam H. Harris took over the lease of the theatre. They operated the theatre into the early 1920s. The theatre then went through another extensive remodel and construction under architect Andrew Rebori before re-opening as the Four Cohans Theatre in 1926; now under co-ownershp by Cohan and the Shubert family . In 1928
14464-429: The type of financial instruments involved. For example, in the case of a swap involving two bonds , the benefits in question can be the periodic interest ( coupon ) payments associated with such bonds. Specifically, two counterparties agree to the exchange one stream of cash flows against another stream. These streams are called the swap's "legs". The swap agreement defines the dates when the cash flows are to be paid and
14592-429: The underlying asset in the future, the "buyer" of the contract, is said to be " long ", and the party agreeing to sell the asset in the future, the "seller" of the contract, is said to be " short ". While the futures contract specifies a trade taking place in the future, the purpose of the futures exchange is to act as intermediary and mitigate the risk of default by either party in the intervening period. For this reason,
14720-562: The unemployed. In the spring of 1937 Republic Steel Works witnessed the Memorial Day massacre of 1937 in the neighborhood of East Side. In 1933, Chicago Mayor Anton Cermak was fatally wounded in Miami, Florida , during a failed assassination attempt on President-elect Franklin D. Roosevelt . In 1933 and 1934, the city celebrated its centennial by hosting the Century of Progress International Exposition World's Fair . The theme of
14848-649: The visual arts, literature , film, theater , comedy (especially improvisational comedy ), food , dance, and music (particularly jazz , blues , soul , hip-hop , gospel , and electronic dance music , including house music ). Chicago is home to the Chicago Symphony Orchestra and the Lyric Opera of Chicago , while the Art Institute of Chicago provides an influential visual arts museum and art school . The Chicago area also hosts
14976-664: The waterfront. Landfill extends into portions of the lake providing space for Navy Pier , Northerly Island , the Museum Campus , and large portions of the McCormick Place Convention Center. Most of the city's high-rise commercial and residential buildings are close to the waterfront. An informal name for the entire Chicago metropolitan area is "Chicagoland", which generally means the city and all its suburbs, though different organizations have slightly different definitions. Major sections of
15104-539: The world's first skyscraper in 1885, using steel-skeleton construction. The city grew significantly in size and population by incorporating many neighboring townships between 1851 and 1920, with the largest annexation happening in 1889, with five townships joining the city, including the Hyde Park Township , which now comprises most of the South Side of Chicago and the far southeast of Chicago, and
15232-431: Was John H. Rauch, M.D. Rauch established a plan for Chicago's park system in 1866. He created Lincoln Park by closing a cemetery filled with shallow graves, and in 1867, in response to an outbreak of cholera he helped establish a new Chicago Board of Health. Ten years later, he became the secretary and then the president of the first Illinois State Board of Health, which carried out most of its activities in Chicago. In
15360-472: Was called the Society for Human Rights . It produced the first American publication for homosexuals, Friendship and Freedom . Police and political pressure caused the organization to disband. The Great Depression brought unprecedented suffering to Chicago, in no small part due to the city's heavy reliance on heavy industry. Notably, industrial areas on the south side and neighborhoods lining both branches of
15488-604: Was first published in 1973. Options contracts have been known for many centuries. However, both trading activity and academic interest increased when, as from 1973, options were issued with standardized terms and traded through a guaranteed clearing house at the Chicago Board Options Exchange . Today, many options are created in a standardized form and traded through clearing houses on regulated options exchanges , while other over-the-counter options are written as bilateral, customized contracts between
15616-462: Was founded in 1837, most of the early building was around the mouth of the Chicago River, as can be seen on a map of the city's original 58 blocks. The overall grade of the city's central, built-up areas is relatively consistent with the natural flatness of its overall natural geography, generally exhibiting only slight differentiation otherwise. The average land elevation is 579 ft (176.5 m) above sea level . While measurements vary somewhat,
15744-578: Was held in a purpose-built auditorium called the Wigwam . He defeated Douglas in the general election, and this set the stage for the American Civil War . To accommodate rapid population growth and demand for better sanitation, the city improved its infrastructure. In February 1856, Chicago's Common Council approved Chesbrough 's plan to build the United States' first comprehensive sewerage system. The project raised much of central Chicago to
15872-533: Was incorporated on Saturday, March 4, 1837, and for several decades was the world's fastest-growing city. As the site of the Chicago Portage , the city became an important transportation hub between the eastern and western United States. Chicago's first railway, Galena and Chicago Union Railroad , and the Illinois and Michigan Canal opened in 1848. The canal allowed steamboats and sailing ships on
16000-521: Was later demolished in May 1962 to make way for the construction of the Richard J. Daley Center which is situated on the same property. 41°53′03″N 87°37′49″W / 41.8842°N 87.6304°W / 41.8842; -87.6304 Chicago Chicago is the most populous city in the U.S. state of Illinois and in the Midwestern United States . With a population of 2,746,388, as of
16128-461: Was repealed. The 1920s saw gangsters , including Al Capone , Dion O'Banion , Bugs Moran and Tony Accardo battle law enforcement and each other on the streets of Chicago during the Prohibition era . Chicago was the location of the infamous St. Valentine's Day Massacre in 1929, when Al Capone sent men to gun down members of a rival gang, North Side, led by Bugs Moran. From 1920 to 1921,
16256-477: Was resolved by 1933, and at the same time, federal relief funding began to flow into Chicago. Chicago was also a hotbed of labor activism, with Unemployed Councils contributing heavily in the early depression to create solidarity for the poor and demand relief; these organizations were created by socialist and communist groups. By 1935 the Workers Alliance of America begun organizing the poor, workers,
16384-448: Was this type of derivative that investment magnate Warren Buffett referred to in his famous 2002 speech in which he warned against "financial weapons of mass destruction". CDS notional value in early 2012 amounted to $ 25.5 trillion, down from $ 55 trillion in 2008. Derivatives are used for the following: Lock products are theoretically valued at zero at the time of execution and thus do not typically require an up-front exchange between
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