Chapter 1: Derivative: a contract between two parties providing for a payoff from one party to the other determined by the price of an asset, an exchange rate, a commodity price, or an interest rate. Derivative product is defined as financial contracts with settlement depending on the outcome of the underlying assets in the future. Advantages of OTC: terms can be tailored to specific needs of the parties, private market in which no one needs to know about the transactions, unregulated. Disadvantages of OTC: credit risk is higher, transaction size larger than what normal investors can handle. Chapter 8:Forward vs. Futures: definition: a contract between a buyer and a seller to purchase or sell something (the underlying) at a later date (maturity date) at a price (called forward/futures price) agreed upon today. Forward: unregulated, OTC traded, larger bet each contract, $84T mkt size, margin account usually required. Future: regulated and exchange traded margin account always required. Arbitrageurs attempt to profit from differences in the prices of otherwise identical spot and futures positions. Two rules: do not take any risk do not spend any money. Hedging: A) Long in the “underlying” → when the underlying price goes up, you will be happy, but sad when the price decreases. B) Short in the “underlying” → when the underlying price decreases, you will be happy, but sad when the price goes up. IF current position is type (a), sell forward/futures contracts to hedge. IF current position is type (b), buy forward/futures contracts to hedge. Ways to exit forward/futures contract: submit offsetting trade before or on last trading day. et your contract expire and wait for final settlement right after maturity date. For contracts with cash settlement: last trading date is the settlement date for contracts with delivery settlement: last trading date is the position date. Exchange for Physicals (EFP): the only type of permissible futures transaction that occurs off the floor of the exchange the holders of long and short positions get together and agree on a cash transaction that would close out their futures position. EFP market simply gives parties additional flexibility in making delivery, choosing the terms, and conducting such business when the exchanges are closed. Chapter 2:Call: the holder has the right to buy a specific amount (contract size) of the “underlying” at the predetermined “strike price” on (European Style) or before-or-on the maturity day (American Style). Put: the holder has the right to sell a specific amount (contract size) of the “underlying” at the predetermined “strike price” on (European Style) or before-or-on the maturity day (American Style). A bullish trader can choose to buy a call or short a put. A bearish trader can choose to buy a put or short a call. if your current position is long in the underlying, buy put options to hedge. If your current position is short in the underlying, buy call options to hedge. You cannot hedge by shorting options! Pro’s of hedging with options: Flexibility and profit potential. Chapter 3: Important five factors: S0 current stock price, X Exercise Price, r the applicable risk free rate applied during the duration of the option, St stock price at expiration, T length to maturity. S0 has a POSITIVE effect on CALL value, but a NEGATIVE effect on PUT value. X has a NEGATIVE effect on CALL, but a POSITIVE effect on PUT. R has a positive effect on CALL value, but a NEGATIVE effect on PUT. T always has a non-negative effect on American options,…
Part II - Financial Options
Please define the following:
1). Call Option – gives its owner the right to buy a share of stock at a fixed price.
2). Put Option - gives its owner the right to sell a share of stock at a fixed strike price.
3). Exercise Value - which is any profit from immediately exercising an option.
4). Strike Price – sometimes called the exercise price because it is the price at which you exercise the option.
5). Writing an option - unlike new shares of stock that…
their intrinsic motivation, caring behaviors, and future intention to participate in the sport. Volleyball clinic
(Sample 1: N = 71) and basketball summer camp (Sample 2: N = 138) participants completed the survey.
Canonical correlation analyses for each sample revealed one significant function indicating that the athletes’
perceptions of a caring/task-involving climate, along with low perceptions of an ego-involving climate, were
associated with higher levels of intrinsic motivation, caring…
19-1. A call option is a short-term option to buy a specified number of shares at a stated price within a specified time period.
A right is a corporate-created option to purchase a stated number of shares at a specified price within a specified period of time (usually within a few months).
A warrant is a long-term option created by a corporation that allows the holder to purchase a stated number of shares at a specified price within a specified period…
• Options contracts
• Pricing of the options contract
• Investment strategies with options
Financial Derivatives Options contracts
BKM: Chapters 20&21
1. Options contract
• Understand the basic terminology with
• Be able to calculate the profit/loss to various
options positions as a function of ultimate
• An option contact gives its holder the right to…
Readings: Chapter 5 from John C. Hull “Risk management and financial institutions”
International Edition (2nd). Pearson. Available from the M onash library
Derivatives and their use
Derivatives are a form of contingent claim – their
value is contingent upon that of some underlying
asset (or other variable).
It is a contract between two parties that specifies
payment (or delivery of goods) whereby payment
needs to be made.
Who are users of derivatives
Financial Options and
Applications in Corporate
Topics in Chapter
Financial Options Terminology
Option Price Relationships
Black-Scholes Option Pricing Model
The Big Picture:
The Value of a Stock Option
Stock Price =
(1 + rs )1
(1 + rs)2
Portfolio of stock and
risk-free bond that
replicates cash flows
of the option
(1 + rs)∞
Value of option must
be the same as the
neutral Strategy 3
1) Defined the Mispriced option 3
2) Risk neutral portfolio 4
3) Transaction cost 4
4) Summary of the strategy 5
5) Adjustments for the strategy 5
6) Close out the position 6
Further developed strategy 7
1) Develop strategy 7
2) Close out of the position 9
Options are the derivatives of the underlying assets. Its value depends on the underlying assets. Like a stock, an option has its fair value and will be mispriced which gives us the arbitrage…
Alexis Azadian February 1, 2015
What Will the World Provide?
As technology changes, human society becomes inferior in terms of social disparity and intrinsic human rights. The movie District 9 is an example of how technology is continually extinguishing society’s ability to function. The world is compiled of intertwined societal normalities that are extremely complicated. These issues that evolving technology introduce to human interaction can be solved through the principal feelings…
Forward, Futures, & Options
Heather L. Dirgo
BUS450: International Finance
Instructor Kristian Morales
September 29, 2014
Forward, Futures, & Options
Fundamentally, forward and futures abridge have the same function: each symbol of contracts allow people to buy or sell a particular type of asset at a particular time at a given price. However, it is in the specific details that these contracts differ.
First, futures contracts are exchange-traded and, therefore, are regularize…
Mechanics of Options Markets
A corporate treasurer is designing a hedging program involving foreign currency options. What are the pros and cons of using (a) the NASDAQ OMX and (b) the over-the-counter market for trading?
The NASDAQ OMX offers options with standard strike prices and times to maturity. Options in the over-the-counter market have the advantage that they can be tailored to meet the precise needs of the treasurer. Their disadvantage…