This preview shows pages 1–2. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: Derivatives From Last Time A series of short-term bonds is preferred to a long-term bond by assumption in the preferred habitat theory. This assumption is necessary if it is to explain the upward slope of the yield curve. Advocates of the expectations theory would argue that any term premiums are very small so that the expectations theory provides a reasonable approximation of reality. The term premium is determined by investor preferences for short-term versus long-term bonds. The stronger the preference for short-term bonds, the larger the term premium. Futures and Options Derivatives are assets that derive their economic value from an underlying asset such as bonds or shares of stock. There are two types of derivatives: futures and options. A futures contract is an agreement that specifies the sale of an asset at an agreed-upon future date at a currently agreed-upon price. The buyer of a futures contract assumes the long position, the right to receive an asset, while the seller takes the short position, an obligation to deliver the...
View Full Document