Lec%209%20-%20Deriviative%20Securities%201

Lec%209%20-%20Deriviative%20Securities%201 - Learning...

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BANK 3004 Portfolio and Fund Management © HB, 2009 Lecture 9 TOPIC 7 Derivative Securities 1 “Learning without thought is labour lost; thought without learning is perilous.” Confucius, from The Confucian Analects , c. 500 BC, translated by James Legge, 1893 © HB, 2009 Derivatives r Derivative securities Their prices are determined by, or “derive from”, the prices of other securities. Their payoffs are contingent on the prices of other securities – contingent claims . Derivatives Options Futures Swaps We will cover only Chapters 15 and 16, about options © HB, 2009 Options Option Characteristics Option Strategies Option Valuation This Lecture This Lecture Next Lecture
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BANK 3004 Portfolio and Fund Management © HB, 2009 r Derivatives – key ideas c Recognise that derivatives are another security. A separate investment class? c Taking a derivatives position implies taking a view on expected future market outcomes. Tools for both hedging and speculation. c Derivatives may have asymmetric pay-offs Useful characteristic if you want to change the pattern of possible future cash flows associated with your investments Key Ideas in Derivatives © HB, 2009 r Derivatives – key ideas c Derivatives may be used to change the risk profile of an existing portfolio » Absorbing risk (speculation) » Reducing risk (hedging) c Derivatives are a form of leveraged investment » Equivalent (in cash flow terms) to a position in a risk-free and a risky asset © HB, 2009 Option bases r Different types and bases of options Stock options Index options Futures options Foreign currency options Interest rate options Commodity options r Underlying asset The asset on which the option contract is written.
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BANK 3004 Portfolio and Fund Management © HB, 2009 Option terminology r Basic option types Call Put r Option positions Buy – long position Sell – short position r Key elements in pricing Exercise (or strike) price (X) Premium or price (C or P) Maturity (or expiration) (T) Price of underlying asset (S t ) Volatility of underlying asset’s price ( σ ) r Market and Exercise Price Relationships In the money (when exercise would be profitable) Out of the money (when exercise is not profitable) At the money (when X = S) r American v European options American can be exercised before expiration. European can be exercised only on expiry date. © HB, 2009 Options Contracts r Two basic types of options contracts: A call option gives the holder a right to buy an asset by a certain date for a certain price. A put option
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Lec%209%20-%20Deriviative%20Securities%201 - Learning...

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