Ch01HullOFOD7thEd - Introduction Introduction Chapter 1...

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Introduction Introduction Chapter 1 1 Options, Futures, and Other Derivatives, 7th Edition, Copyright © John C. Hull 2008
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Size of OTC and Exchange-Traded Markets Size of OTC and Exchange-Traded Markets (Figure 1.1, Page 3) (Figure 1.1, Page 3) Options, Futures, and Other Derivatives, 7th Edition, Copyright © John C. Hull 2008 2 Source: Bank for International Settlements. Chart shows total principal amounts for OTC market and value of underlying assets for exchange market
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Options, Futures, and Other Derivatives, 7th Edition, Copyright © John C. Hull 2008 3 Ways Derivatives are Used Ways Derivatives are Used To hedge risks To speculate (take a view on the future direction of the market) To lock in an arbitrage profit To change the nature of a liability To change the nature of an investment without incurring the costs of selling one portfolio and buying another
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Options, Futures, and Other Derivatives, 7th Edition, Copyright © John C. Hull 2008 4 Foreign Exchange Quotes for Foreign Exchange Quotes for GBP, July 20, 2007 GBP, July 20, 2007 (See page 4) (See page 4) Bid Offer Spot 2.0558 2.0562 1-month forward 2.0547 2.0552 3-month forward 2.0526 2.0531 6-month forward 2.0483 2.0489
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Options, Futures, and Other Derivatives, 7th Edition, Copyright © John C. Hull 2008 5 Forward Price Forward Price The forward price for a contract is the delivery price that would be applicable to the contract if were negotiated today (i.e., it is the delivery price that would make the contract worth exactly zero) The forward price may be different for contracts of different maturities
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Options, Futures, and Other Derivatives, 7th Edition, Copyright © John C. Hull 2008 6 Terminology Terminology The party that has agreed to buy has what is termed a long position The party that has agreed to sell has what is termed a short position
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Options, Futures, and Other Derivatives, 7th Edition, Copyright © John C. Hull 2008 7 Example Example (page 4) (page 4) On July 20, 2007 the treasurer of a corporation enters into a long forward contract to buy £1 million in six months at an exchange rate of 2.0489 This obligates the corporation to pay $2,048,900 for £1 million on January 20, 2008 What are the possible outcomes?
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Options, Futures, and Other Derivatives, 7th Edition, Copyright © John C. Hull 2008 8 Profit from a Profit from a Long Forward Position Long Forward Position Profit Price of Underlying at Maturity, S T K
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Ch01HullOFOD7thEd - Introduction Introduction Chapter 1...

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