Chapter 18 - CHAPTER18 DerivativesandRisk Management...

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    18-1 CHAPTER 18 Derivatives and Risk  Management Derivatives: Forward, futures, options Put call parity, Black Scholes Formula Other derivatives: swaps, rights, warrants Hedging with derivatives
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    18-2 What is a derivative? A derivative is a financial contract  between two parties to transact an  asset at a fixed price at a future date.   It derives value from other assets or  events.
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    18-3 Definitions Buyer: one who buys the derivative.   Writer: one who sells the derivative. Long position: the position of the  buyer. Short position: the position of the  writer. Expiry date: the date when cash flows  would be exchanged.
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    18-4 Definitions Underlying asset: the asset to be  transacted. Strike price (or exercise price): the  transaction price of the underlying  asset at the expiry date. Counter parties: the opposite party in  the derivative contract
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    18-5 The Forward Contract A financial contract which allows the  buyer to buy a specific asset at a  specific price on a specific future date. The seller has to sell to the buyer that  asset at that price and at that future  date. Delivery date: expiry date.
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    18-6 The Forward Contract Payoff Payoff:  the profit  brought  about by  the  contract.
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    18-7 The Forward Contract Payoff Payoff:  the profit  brought  about by  the  contract.
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    18-8 The Futures Contract Similar to forward contracts Specifications standardized:  underlying asset, contract size, expiry  date. Traded in exchanges Many types: e.g. commodity, interest  rates, equity, FX etc.
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    18-9 Features of Futures Contract Margin account: Initial margin Maintenance margin Margin call
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Chapter 18 - CHAPTER18 DerivativesandRisk Management...

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