Derivative10Lec1

# Derivative10Lec1 - FINA529IntroductiontoDerivatives

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FINA529 – Introduction to Derivatives  Instructor: Jerome Yen, Visiting  Professor, Dept. of Finance

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Administration e-mail:  jyen@ust.hk  or  risksolution@gmail.com   Tel: 2358-8204 Office: 4382E Teaching Assistant: Cynthia Pan cynthiap@ust.hk
Grading Final: 60 percent (will be given during  week 6)  Group project: 40 percent (up to three  team members)

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Content Outline 1. Introduction  2. What is a derivative? 3. Reasons to use derivatives 4. Concepts to understand 5. Futures   6. Forwards  7. Options  8. Swaps   9. Questions
The Nature of Derivatives A derivative is an instrument whose  value depends on the values of other  more basic underlying variables,  such as, stocks.   Or A derivative is an instrument whose  value is a function the values of other  more basic underlying variables

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Introduction (I) In the financial marketplace some instruments are regarded as  fundamentals , while  others are regarded as  derivatives Financial Marketplace Derivatives  Fundamentals  Simply another way to catagorize the diversity in the FM*.
Financial Marketplace Derivatives  Fundamentals  Stocks  Bonds  Etc. Futures Forwards Options Swaps Introduction (II)

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Classic and Derivatives Market    Underlying Assets        Cash       Commodities    ( wheat, gold )  Fixed income   ( T-bonds )          Stock       Equities             ( AOL stock )          Currency      Currencies          ( GBP, JPY )      Volatility? Contracts   Forward   Swap   :     FRAs ,       Caps, Floors,      Interest Rate Swaps     Futures   Options :      Options,        Convertibles Bond Option,         Swaptions
What is a Derivative? (I) Options Swaps Forwards Futures The value of the derivative  instrument is DERIVED  from the underlying  security Underlying instrument such as a commodity, a stock, a stock index, an exchange  rate, a bond, another derivative etc. .

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Options Swaps Forwards Futures The  owner  of  an  options  has  the  OPTION  to  buy  or  sell  something at a predetermined price and is therefore more costly  than a futures contract. The  owner  of  a  forward  has  the  OBLIGATION  to  sell  or  buy  something in the future at a predetermined price. The difference  to a future contract is that forwards are not  standardized . The  owner  of  a  future  has  the
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Derivative10Lec1 - FINA529IntroductiontoDerivatives

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