lecture3 - Page 1 of 4 Help Week 3 Derivatives Risk...

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Introduction | Financial Options | Real Options | Other Types of Derivatives | Hedging with Futures | Hedging with Swaps | Risk Management This week, you will be introduced to the exciting world of derivatives and the ways these instruments can be used by managers to mitigate components of risk that companies face in the real corporate world. The derivative market has grown more rapidly than any other major market in recent years, largely due to computers and electronic communications as well as globalization, which has greatly increased the importance of currency markets and the need for reducing exchange rate risks brought on by global trade. Note, however, that derivatives have a potential downside: Derivatives are highly leveraged, and small miscalculations can lead to mega losses such as those at Barings Bank and Orange County, California. First, we will look at financial options and their valuation introduced in chapter 8. Understanding basic financial options helps one manage the value of real options as covered by chapter 25. Once you are comfortable with the concept of financial options, you will feel more comfortable with tackling the derivatives, which are introduced in chapter 23. Please notice the factors that affect the value of a call option: 1. Market price versus strike price: The higher the stock's market price in relation to the strike price, the higher will be the call option price. 2. Level of strike price: The higher the strike price, the lower the call option price. 3. Length of option: The longer the option period, the higher the option price. The text introduces two option pricing models, the so-called binomial approach and Week 3: Derivatives & Risk Management - Lecture Help Print This Page Introduction Consider this to be introductory material only! For those interested in gaining more depth in derivatives, please consider proceeding towards the highly respected industry CFA designations through DeVry University, where you will deal with financial and real options in great detail. Financial Options Page 1 of 4 5/29/2011 ..
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the famous Black-Scholes Option Pricing Model (OPM) developed in 1973 (and earning a Nobel prize in economics in 1997), which gave a huge boost to the options trading. Please notice that all option pricing models are based on the concept of a riskless hedge of a portfolio that will be able to earn a riskless rate regardless of the price of the stock. This is an important concept.
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lecture3 - Page 1 of 4 Help Week 3 Derivatives Risk...

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