11 - Derivatives Markets 2

11 - Derivatives Markets 2 - 10/21/2008 Lecture 11 TOPIC 6...

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10/21/2008 1 © HB, 2008 Lecture 11 TOPIC 6 Derivatives Markets 2 (Options Markets) © HB, 2008 Financial Derivatives r Derivatives Again Managing Risk » Financial derivatives r “An instrument whose value depends on (is derived from) the price of an underlying financial asset” Valentine et al, 2006: 355, 423. » Hedging r Hedge – engage in a financial transaction that reduces or eliminates risk. r Futures contracts can be used to hedge risk. However, hedging using futures also causes us to give up the possibility of a gain. © HB, 2008 Options Contracts r What is an option? An option is a security that gives its owner the right to buy or sell another, underlying security, at or before a future pre-determined date for a pre-determined price. r Two 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 gives the holder a right to sell an asset by a certain date for a certain price.
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2 r Option characteristics The option holder (buyer) Gets a right , but not an obligation to buy or sell the underlying security. An option need not be exercised, if it is not in the holder’s interest to do so. That is why it is called an option. If the owner sells or buys the underlying security, we say that the owner exercises the option. © HB, 2008 r Option characteristics The option seller The seller is obligated to perform, should the buyer desire to exercise the right. In contrast, in a futures contract, there is a legal obligation for both parties to ‘perform’. The seller is also called the writer of the option. © HB, 2008 © HB, 2008 r Example A call option on an AMP Ltd share Contract: Right to buy an AMP share for $6.25 in December 2008. This option sells for $0.49. BUYER
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This note was uploaded on 10/19/2011 for the course BANK 1005 taught by Professor Hb during the Three '09 term at South Australia.

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11 - Derivatives Markets 2 - 10/21/2008 Lecture 11 TOPIC 6...

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