4500.14 - - 1 - Topic 4: Derivative Securities in Global...

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Unformatted text preview: - 1 - Topic 4: Derivative Securities in Global Financial Markets Purpose: • Provide background on the basics of Option Pricing Theory (OPT) • Examine some recent applications of derivatives in international finance - 2 - Derivatives Derivative = obligation to accomplish a transaction in the future Forward Contract = basic derivative from which all others have evolved • Repurchase Agreements – Reverse Repurchase Agreements • Futures Contracts - 3 - Derivatives • Swaps – Futures and Forward Contracts On Swaps • Options – Currency Options – Swaptions – Options On Futures – Futures On Options - 4 - What are options? • Options are financial contracts whose value is contingent upon the value of some underlying asset • Such arrangements are also known as contingent claims – because equilibrium market value of an option moves in direct association with the market value of its underlying asset. • OPT measures this linkage - 3 - Derivatives • Swaps – Futures and Forward Contracts On Swaps • Options – Currency Options – Swaptions – Options On Futures – Futures On Options - 4 - What are options? • Options are financial contracts whose value is contingent upon the value of some underlying asset • Such arrangements are also known as contingent claims – because equilibrium market value of an option moves in direct association with the market value of its underlying asset. • OPT measures this linkage - 5 - The basics of options Calls and puts defined • Call: privilege of buying the underlying asset at a specified price and time • Put: privilege of selling the underlying asset at a specified price and time - 6 - The basics of options Regional differences • American options can be exercised anytime before expiration date • European options can be exercised only on the expiration date • Asian options are settled based on average price of underlying asset - 7 - The basics of options • Options may be allowed to expire without exercising them • Options game has a long history – at least as old as the “premium game” of...
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This note was uploaded on 04/15/2011 for the course FINA 4500 taught by Professor Staff during the Spring '08 term at North Texas.

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4500.14 - - 1 - Topic 4: Derivative Securities in Global...

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