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Chapter+1+Slides+Introduction - Derivative Securities...

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FIN 480 (Instructor- Saif Rahman) Derivative Securities Chapter 1 Introduction
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1 FIN 480 (Instructor- Saif Rahman) Summary 9 1. Nature of derivatives: futures, options and swaps. 9 2 . The origin of derivatives 9 3. payoffs from futures and options 9 4. Options and leverage. 9 5. How are derivatives used?
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2 FIN 480 (Instructor- Saif Rahman) ± Although the benefits and costs of derivatives remain the subject of spirited debate, the performance of the economy and the financial system in recent years suggests that those benefits have materially exceeded the costs." Alan Greenspan in a speech on May 8, 2003
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3 FIN 480 (Instructor- Saif Rahman) I can think of no other area that has the potential of creating greater havoc on a global basis if something goes wrong Dr. Henry Kaufman, May 1992 Derivatives are the dynamite for financial crises and the fuse-wire for international transmission at the same time. Alfred Steinherr, author of Derivatives: The Wild Beast of Finance (1998)
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4 FIN 480 (Instructor- Saif Rahman) The Nature of Derivatives A derivative is an instrument whose value depends on the values of other more basic underlying variables ± It has no independent value ie., its value is entirely derived from value of underlying asset ± The underlying asset can be securities, commodities, bullion, currency, interest rates, indices, live stock etc Derivatives do not eliminate the risk in the economy. They merely help transfer risk to third parties who are in a better position to handle risk.
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5 FIN 480 (Instructor- Saif Rahman) 5 Types of Derivatives ± Futures ± Forwards ± Swaps ± Options ± Calls ± Puts
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6 FIN 480 (Instructor- Saif Rahman) 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
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This note was uploaded on 03/23/2011 for the course BUSINESS bus 173 taught by Professor Rtm during the Spring '11 term at IUP.

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Chapter+1+Slides+Introduction - Derivative Securities...

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