Intro_new

Intro_new - Options and Futures Markets (FIN 15.437) Prof....

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Slide 1-1 Options and Futures Markets (FIN 15.437) Prof. Alex Stomper Teaching Assistant: Apurv Jain
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Slide 1-2 Introduction to Derivatives Introduction to Derivatives Chapters 1 & 2
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Slide 1-3 What is a derivative? Definition: – A derivative is a bilateral contract to exchange assets. The value of this contract depends on the value of some reference variable. – Think of a bet. Basic types: Options, forwards/futures, and swaps – Any financial asset can be constructed from these “building blocks of financial engineering.” Uses: – Risk management – Speculation – Saving transaction costs – (Regulatory) arbitrage Economic role of derivatives markets: Risk allocation Informational role of derivatives markets: Market expectations about future spot markets
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Slide 1-4 Exchange-traded derivatives Source: Bank for International Settlements (BIS)
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Slide 1-5 OTC derivatives Source: Bank for International Settlements (BIS)
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Slide 1-6 Economic derivatives Source: Gadanecz, Moessner, and Upper (2007), BIS Economic Derivatives, Market Size 2006 0 1 2 3 4 5 6 7 8 9 10 Consumer Price Index Gross Domestic Product Euro Area CPI Initial Jobless Claims International Trade Balance Non-Farm Payrolls Retail Sales Millions of US$
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Slide 1-7 Prediction markets, e.g. HSX: Actual vs. predicted box office numbers
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Slide 1-8 When-issued markets • Markets for derivatives based on securities issues. – These markets facilitate the pricing and/or the distribution of securities issues. • Examples: – When-issued markets for Treasury bonds – Pre-IPO (grey) markets increase the transparency of many European IPOs.
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Slide 1-9 This course: 1st half • Financial forwards and futures • Commodity forwards and futures • Link between spot and forward markets • Hedging with futures • Metallgesellschaft • Interest rate forwards and futures • Swaps • FX swaps • Disney case
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Slide 1-10 This course: 2nd half • Options intro • Option pricing: parity relations • American vs. European options • Binomial option pricing • Black Scholes option pricing • Hedging options (delta hedging) • Implied binomial trees • Portfolio insurance • Leland O´Brian Rubinstein Associates Case
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Slide 1-11 Outline of the remaining lecture • Basic derivatives contracts: – Forward/futures contracts – Call options – Put options • Types of positions: – Long position – Short position • Graphical representations: – Payoff diagrams – Profit diagrams
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Intro_new - Options and Futures Markets (FIN 15.437) Prof....

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