Topic 10. Introduction to Derivatives (1).pptx

Topic 10. Introduction to Derivatives (1).pptx - BX2031...

Info icon This preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
Introduction to Derivatives 1 BX2031  Personal portfolio Management
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Overview of Sessions Video 1 – Introduction to derivatives 1 Introduction 2 Forward contracts 3 Futures markets 4 Futures contracts 5 Options 6 The Black-Scholes-Merton option pricing model 7 Introduction to Swaps Required reading: Chapter 15 & 16 Brailsford et al. (2015) 5 th ed.
Image of page 2
After completion of this chapter you should be able to: understand the role and use of derivative instruments and markets understand the difference between forward and futures contracts describe the features and advantages of futures contracts describe the types of futures contracts, especially those listed in Australia be able to price futures contracts be familiar with options be able to apply the Black & Scholes option pricing model understand the use and value of futures and options contracts in investment portfolios 3 Learning outcomes:  Introduction to derivatives
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
A derivative security is defined as “a financial instrument whose value depends on, or is derived from, some underlying security” Its price changes with price movements in the underlying instrument. It is used for managing price risk or for speculation on future price movements. Example include: equities commodities currencies interest rates. 4 Introduction
Image of page 4
Forward contracts are an agreement to buy (long) or sell (short) a specified asset at a specified price (delivery price) at some future time. There is a linear pay off at maturity. If maturity price > forward price then long position profits (sold position loses). If maturity price < forward price then long position loses (sold position profits). 5 Forward contracts
Image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Forward contracts: are generally over the counter contracts (OTC) involve considerable counterparty risk risk can be countered by using collateral are flexible: there is nothing preventing any two parties setting up their own forward contract. have a limited secondary market. 6 Forward contracts
Image of page 6
Consider the following quoted rates on the AUD/USD: Spot rate: $0.5917 1-month forward rate: $0.5907 2-month forward rate: $0.5899 3-month forward rate: $0.5892 6-month forward rate: $0.5879 The spot rate indicates that one Australian dollar is worth US$0.5917 today (assuming delivery within two days). The one-month forward rate indicates that a contract entered into today to exchange Australian and US dollars in 30 days’ time will occur at a price of one Australian dollar for US$0.5907. Also forward rates here are also known as swap rates. 7 Forward contracts
Image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Uses of forward contracts They tend to be used for hedging purposes e.g. where the future price, interest rate or exchange rate can be locked in, thereby removing the risk of future price fluctuations.
Image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern