Chapter11 - Chapter 11 Derivatives Markets Derivative...

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Chapter – 11 Derivatives Markets
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Derivative Securities Derive their value from some other security Economic justification To allow market participants to transfer price risk
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FUTURES AND FORWARDS Futures Contract : A contract to make or take delivery of a commodity at a certain price on a certain date; traded on an exchange; amount of commodity, grade or quality and delivery location specified. “Commodity” – security agricultural product foreign currency stock index Forward Contract : Not standardized Not traded on an exchange Privately negotiated
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make delivery” seller (short futures) “take delivery” buyer (long futures) Initial margin performance bond ($) Posted by each trader, guaranteeing contract fulfillment (does not mean borrowed $) Contracts are marked to market daily daily settlement reflects gains/losses and cash payments are made Maintenance margin if losses too great, need to post additional money
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Speculators – assume price risk in the future market in hopes of potential profit Traders short-term speculators, usually on exchange floor Hedgers – transferring cash market price risk to someone else through a futures market transaction Types of Futures Market Participants
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The goal of all hedging A loss (profit) in your cash market position is exactly offset by again (loss) in the futures position
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This note was uploaded on 03/24/2011 for the course FINA 409 taught by Professor John during the Spring '11 term at Ohio State.

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Chapter11 - Chapter 11 Derivatives Markets Derivative...

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