Week 1 - Chapter 1

Week 1 - Chapter 1 - Chapter1 FINA0301Derivatives Dr.TaoLin...

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1 FINA0301  Derivatives Faculty of Business and Economics  University of Hong Kong Dr. Tao Lin Chapter 1 Introduction to Derivatives
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2 Chapter Outline What Is a Derivative? Ways to Think about Derivatives  An Overview of Financial Markets The Role of Financial Markets Buying and Short-Selling Financial Assets
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3 What are Derivatives? derivative security  is a financial instrument  whose value  derives  from that of some other  underlying asset or assets whose price are  taken  as given.   Remark: The value of a derivative is in a  relative   sense. No need to inquire into the deeper  economic forces that determine the prices of the  underlying assets. 
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4 Types of Derivatives Forwards contract  and  futures contract  are  agreements to buy or sell  an asset at a certain  future time T for a certain price K. Swaps  are similar to forwards, except that the  parties commit to multiple exchanges at different  points in time. call option  gives the holder the  right to buy   the underlying asset by a certain date T for a  certain price K . put option  gives the holder the  right to sell   the underlying asset by a certain date T for a  certain price K .
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A Concrete Example You enter an agreement with a friend that says: If  the price of a bushel of corn in one year is  greater than $3, you will pay him $1 If  the price is less than $3, he will pay you $1 This agreement is a  derivative Questions : What happens one year later? (outcome, carry-out) Why do you or your friend want to enter this  agreement at the first place? Does the agreement have any value itself?
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This note was uploaded on 01/26/2010 for the course FINA 2802 taught by Professor Xia during the Fall '09 term at HKU.

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Week 1 - Chapter 1 - Chapter1 FINA0301Derivatives Dr.TaoLin...

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