Potential Gains and Losses - Short paper of FIN 670...

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Short paper of FIN 670 Potential Gains and Losses A derivative is a financial instrument, or contract, between two parties that derives its value from some other underlying asset or underlying reference price, interest rate, or index. (1997) Simply put, we can regard the derivative could as a kind of financial product which can allocate the risk of investment or others to several people or parties. The purposes of derivatives also include information discovery, operational advantage and market efficiency. The common derivatives have options, forward contracts, futures contract, and swaps. Common underlying assets include interest rate, exchange tares, commodities, stocks, stock indices, bonds, and bond indices. This paper focuses on interpretation of several derivatives which are Forwards, Futures, Call Options, Put Options, and Swaps. Forwards Forwards is one of derivative securities which can be used to mitigate risk by risk manager or to make a profit by speculator. To other derivatives forward contract is the simplest. The main elements or characters are outlined as following: 1) The forward contracts are OTC derivatives, hence they are not standardized products. In other words, the forward contracts can be modified to satisfy needs of users. 2) This derivative involves two parties which are long and short. 3) The forward contracts have a financial agreement (obligation) to buy and sell. The financial agreements include specific asset, specific future date and specific execution price. It has delivery price (K) and delivery date (T) at inception. 4) In short, on delivery, the transfer of assets is a zero sum game. The long buys the assets at K and takes delivery and the short delivers the assets and receive the price K.
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  • Spring '16
  • Derivative, forward contracts, Derivative Instruments

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