Ch01 - Introduction Chapter 1 Click to edit Master subtitle...

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Click to edit Master subtitle style  7/7/11 Introduction Chapter 1 11
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Click to edit Master subtitle style  7/7/11 1.2 The Nature of Derivatives A derivative is an instrument whose  value depends on the values of other  more basic underlying variables
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Click to edit Master subtitle style  7/7/11 1.3 Examples of Derivatives Futures Contracts Forward Contracts Swaps Options
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 7/7/11  Derivatives-2008 Size of OTC and Exchange-Traded Markets (Figure 1.1, Page 3) 44 Source: Bank for International Settlements. Chart shows total principal amounts for OTC market and value of underlying assets for exchange market 35947 36313 36679 37045 37411 37777 38143 38509 38875 39241 0 50 100 150 200 250 300 350 400 450 500 550 Size of Market ($ trillion)
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 7/7/11  Derivatives-2008 Foreign Exchange Quotes for GBP, July 20, 2007 (See page 4) 55 Bid Offer Spot 2.0558 2.0562 1-month forward 2.0547 2.0552 3-month forward 2.0526 2.0531 6-month forward 2.0483 2.0489
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 7/7/11  Derivatives-2008 Forward Price The forward price for a contract is the delivery price that would be applicable to the contract if were negotiated today (i.e., it is the delivery price that would make the contract worth exactly zero) The forward price may be different for contracts of different maturities 66
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 7/7/11  Derivatives-2008 Terminology The party that has agreed to buy has what is termed a long position The party that has agreed to sell has what is termed a short 77
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 Derivatives-2008 Example (page 4) On July 20, 2007 the treasurer of a corporation enters into a long forward contract to buy £1 million in six months at an exchange rate of 2.0489 This obligates the corporation to pay $2,048,900 for £1 million on January 20, 2008 What are the possible outcomes? 88
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Ch01 - Introduction Chapter 1 Click to edit Master subtitle...

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