Derivativemarkets(U-2009)

Derivativemarkets(U-2009) - 1 PROF. MENACHEM BRENNER STERN...

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Unformatted text preview: 1 PROF. MENACHEM BRENNER STERN SCHOOL OF BUSINESS NEW YORK UNIVERSITY FUTURES AND OPTIONS C15.0043 2 CONTENTS PREVIEW: DERIVATIVE MARKETS AND INSTRUMENTS I. THE STRUCTURE OF FUTURES MARKETS II. PRICING OF FUTURES CONTRACTS III. HEDGING WITH FUTURES CONTRACTS 3 OBJECTIVES : 1. LEARN THE STRUCTURE OF THE MARKETS AND THE PROPERTIES OF THE INSTRUMENTS TRADED IN THESE MARKETS. THIS KNOWLEDGE IS IMPORTANT FOR 2. UNDERSTANDING THE POTENTIAL BENEFITS OF THESE INSTRUMENTS IN RISK MANAGEMENT AND 1. UNDERSTANDING HOW THESE INSTRUMENTS ARE PRICED 4 DERIVATIVE SECURITIES FINANCIAL INSTRUMENTS WHOSE VALUE IS DERIVED FROM OTHER ASSETS OR DEPENDS ON OTHER VARIABLES DISCUSS FUTURES MARKETS (FORWARDS) OPTIONS MARKETS 5 MENACHEM BRENNER 6 FORWARD CONTRACTS A FORWARD CONTRACT IS AN AGREEMENT BETWEEN TWO PARTIES TO TRADE ON A GIVEN FUTURE DATE A GIVEN COMMODITY, OR UNDERLYING ASSET, AT A PRESPECIFIED PRICE (OR FUNCTION) BASIC CONCEPTS : UNDERLYING ASSET - GOLD SPOT (CASH) PRICE - 900 DELIVERY PRICE - 910 DELIVERY DATE - 12/15 FORWARD PRICE - 910 7 FUTURES CONTRACTS A FUTURES CONTRACT IS THE SAME AS A FORWARD CONTRACT EXCEPT: IT IS A STANDARDIZED CONTRACT TRADING ON A FUTURES EXCHANGE 8 MENACHEM BRENNER 9 A. FORWARD AND FUTURES CONTRACTS IN ANY ECONOMY OR BUSINESS THERE IS UNCERTAINTY ABOUT FUTURE PRICES OF COMMODITIES OR FINANCIAL ASSETS THE DESIRE TO REDUCE THAT RISK OR ELIMINATE IT COULD BE IN MANY CASES MET BY THE SPOT MARKET. BUT, THE COST MAY BE PROHIBITIVE. (THE SPOT NON-EXISTENT). THE ALTERNATIVE IS A DEFERRED DELIVERY CONTRACT 10 FORWARD CONTRACTS TWO PARTIES - BUYER AND SELLER SELLER COMMITS TO DELIVER DESIGNATED ASSETS AT A PRESPECIFIED PRICE IN A PRESPECIFIED QUANTITY ON A GIVEN DATE (SEE EXAMPLE ON NEXT PAGE) OTHER DELIVERY CONDITIONS BUYER ALSO COMMITS NEITHER PARTY CAN WALK AWAY FROM THE CONTRACT VALUE OF COMMITMENT IS, BY CONVENTION, ZERO WHEN INITIATED, BUT MAY CHANGE OVER TIME FORWARD PRICE IS DETERMINED GIVEN ABOVE CONDITIONS 11 EXAMPLE: BUY: 120 OUNCES OF GOLD TERMS: 1. QUANTITY 120 OZ....
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Derivativemarkets(U-2009) - 1 PROF. MENACHEM BRENNER STERN...

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