ecg590i_lecture01

ecg590i_lecture01 - ECG590I Asset Pricing. Lecture 1:...

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ECG590I Asset Pricing. Lecture 1: Introduction to various derivatives 1 1 Introduction to various derivatives What is a stock? Ownership of share of the company. Why is it worth something? You have a claim on: the assets John Seater, North Carolina State University, Fall 2007
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ECG590I Asset Pricing. Lecture 1: Introduction to various derivatives 2 What is a derivative? the values of other, more basic underlying variables. John Seater, North Carolina State University, Fall 2007
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ECG590I Asset Pricing. Lecture 1: Introduction to various derivatives 3 1.1 Two types of markets Exchange traded markets Chicago Board Of Trade (CBOT), Chicago Mercantile Exchange (CME), Chicago Board Options Exchange (CBOE). Over-the-counter markets (OTC) trade non-standardized contracts. Typical trade is much larger than in an exchange Total volume is much larger than in exchanges. John Seater, North Carolina State University, Fall 2007
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ECG590I Asset Pricing. Lecture 1: Introduction to various derivatives 4 1.2 Forward Contracts In contrast with a spot contract , which is an agreement to buy or sell an asset today. John Seater, North Carolina State University, Fall 2007
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ECG590I Asset Pricing. Lecture 1: Introduction to various derivatives 5 Terminology : buy the asset sell the asset S t K S t;T John Seater, North Carolina State University, Fall 2007
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ECG590I Asset Pricing. Lecture 1: Introduction to various derivatives 6 Payo/ is equal to S T ± K where: T = delivery date S t = spot price at time t K = delivery price John Seater, North Carolina State University, Fall 2007
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ECG590I Asset Pricing. Lecture 1: Introduction to various derivatives 7 Payo/ is equal to K ± S T Notice that these are linear functions (and the slope is 1) of S T . John Seater, North Carolina State University, Fall 2007
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8 Forward prices, spot prices and interest rates Suppose in the gold market S t = $300 /oz K t +1 = $340 /oz R = 0.05 1. Borrow $300 for 1 year at 5% interest 2. Buy one ounce of gold 3. Enter into a short forward contract to sell 1 oz. of gold in one year at $340.
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This note was uploaded on 10/05/2009 for the course ECG 590 taught by Professor Msmorril during the Fall '08 term at N.C. State.

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ecg590i_lecture01 - ECG590I Asset Pricing. Lecture 1:...

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