Lecture 17_FORWARDS

Lecture 17_FORWARDS - Lecture 17 Forward Markets and...

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Lecture 17 Forward Markets and Contracts L17 Xiaoding Liu 1 FIN4243 Fall 2009
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Derivatives A derivative is a security that derives its value from the value or return of another asset or security Ex. Forwards Futures Swaps options L17 Xiaoding Liu 2 FIN4243 Fall 2009
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Derivative Trading Over-the-Counter Exchange A dealer market with no central location Central location Largely unregulated market, each contract is with a counterparty Standardized and backed by a clearinghouse Forwards and swaps Options and futures L17 Xiaoding Liu 3 FIN4243 Fall 2009
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Derivatives Forward contract One party agrees to buy and the counterparty to sell a physical asset or a security at a specific price on a specified date in the future L17 Xiaoding Liu 4 FIN4243 Fall 2009
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Derivatives Future contract A forward contract that is standardized and exchange-traded L17 Xiaoding Liu 5 FIN4243 Fall 2009
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Derivatives Swap A series of forward contracts Agreement to exchange a series of cash flows on periodic settlement dates over a certain time period L17 Xiaoding Liu 6 FIN4243 Fall 2009
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Derivatives Options Call Buyer of the option has an option to buy an asset at a particular price Seller has an obligation to sell the asset at the agreed-upon price if option is exercised Put Buyer of the option to sell an asset at a particular price Seller has an obligation to purchase the asset at the agreed-upon price if option is exercised L17 Xiaoding Liu 7 FIN4243 Fall 2009
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Derivatives Criticism Too risky, highly levered, especially to investors with limited knowledge Benefits Provide price information Allow risk to be managed and shifted among market participants L17 Xiaoding Liu 8 FIN4243 Fall 2009
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Forward Contract A forward contract is a bilateral contract that obligates one party to buy and the other to sell a specific quantity of an asset, at a set price, on a specific date in the future L17 Xiaoding Liu 9 FIN4243 Fall 2009
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Forward Contract Purpose Parties may enter into the contract as a speculation on the future price More often, a party seeks to enter into a forward contract to hedge a risk it already has Eliminate uncertainty about the future price of an asset it plans to buy or sell at a later date L17 Xiaoding Liu 10 FIN4243 Fall 2009
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Long The party to the forward contract that agrees to buy the financial or physical asset has a
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This note was uploaded on 12/03/2009 for the course FIN 4243 taught by Professor Dudley during the Fall '08 term at University of Florida.

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Lecture 17_FORWARDS - Lecture 17 Forward Markets and...

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