Topic 13 - BMGT 343 Investments Prof Anna Obizhaeva Office VMH 4428 Phone(301 405-7934 Email [email protected] Section 0101 T Th 9:30-10:45

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1 BMGT 343: Investments Prof. Anna Obizhaeva Office: VMH 4428 Phone: (301) 405-7934 Email: [email protected] Derivatives Anna Obizhaeva Section 0101 T Th 9:30-10:45 am in VMH 1307 Section 0201 T Th 11:00-12:15 pm in VMH 1307 Section 0301 T Th 12:30-1:45 pm in VMH 1307 Office Hours : Wed 10:00-11:00 am or by appointment Derivatives Topic 13: Forwards and Futures Derivatives Anna Obizhaeva
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2 Outline of Topic 13 Introduction to Derivatives Definition of Forwards and Futures Pi i fF d Pricing of Forwards Forwards and Futures Hedging with Forwards and Futures Derivatives Anna Obizhaeva 1. Introduction to Derivatives So far, we have been studying primary assets such as bonds and stocks. There are also derivative assets. A derivative asset is an asset whose value is linked to (or derived from) the value of an underlying asset . Derivatives Anna Obizhaeva
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3 Examples of Underlying Assets Financial : stocks, stock indices, interest rates, currencies. (homogeneous products traded in well-organized centralized markets). Commodities : gold, silver, copper, oil, natural gas, electricity, corn, oat, soybeans, wheat, cattle, pork, hog, bellies, cocoa, coffee, sugar, orange juice. (less homogeneous products, traded in less centralized markets). Derivatives Anna Obizhaeva Other : catastrophes, weather, etc. (not traded at all) Examples of Derivatives Forwards and futures : obligations to buy/sell underlying asset at a specified price and at a specified time. Call option : right , but not obligation, to buy underlying asset at a specified price for a specified period of time. Put option : right , but not an obligation, to sell underlying asset at a specified price for a specified period of time. Swaps : exchange of cash flows according to a specified rule for a Derivatives Anna Obizhaeva specified period of time. CDOs, CDO2, CDSs : other complicated derivatives that we will study later.
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4 Uses of Derivatives There are two main uses of derivatives: Sl t i t d d i ti t t k i k iti ( i k “b t” Speculation : trade derivatives to take a risky position (a risky “bet”) Hedging : trade derivatives to reduce/eliminate the risk of a position. Derivatives Anna Obizhaeva Several Comments For Derivatives Payoffs of derivatives are determined by prices of the underlying asset! Derivative are in a zero net supply compare with positive supply of Derivative are in a zero net supply: compare with positive supply of underlying assets! Traders may establish a large number of agreements or bets between each other linked to future asset values regardless of the number of underlying assets in the economy which is fixed (e.g. the number of stocks issued by companies). Derivatives Anna Obizhaeva In other words, there can be a large number of bets about the game between Capitals and Rangers but only one game. Each bet has long and short sides – “their net bet is zero”.
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5 2. Introduction to Forwards/Futures The origins of forwards trading can be traced to Ancient Greek times.
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This note was uploaded on 02/22/2011 for the course BMGT 343 taught by Professor Staff during the Fall '08 term at Maryland.

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Topic 13 - BMGT 343 Investments Prof Anna Obizhaeva Office VMH 4428 Phone(301 405-7934 Email [email protected] Section 0101 T Th 9:30-10:45

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