Derivatives - basics
Trading strategies using options
Derivatives
Definition
A
derivative security
is a
legal contract between two counterparties; which specifies a
set of payments (payoffs) to be received or paid by each
counterparty;
where the payments depend upon (are a function of) some
other asset’s future price(s), the
underlying asset
.
Sample derivative instruments: futures and forward contracts,
options (calls and puts), exotics (lookback, binary, chooser), swaps
(collection of forwards), warrants, corporate bonds (callable and
convertible), oil wells, gold mines, eletricity mills, marriage, life.
Underlying assets can be: stocks, indexes, exchange rates,
aluminum, weather, pork bellies,
. . . .
c
Diego Garc´
ıa, BUSI 588, Kenan-Flagler, Fall 2011
Lecture 2 - Options payoffs and strategies
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Derivatives - basics
Trading strategies using options
Derivatives markets
Most derivative contracts are traded over-the-counter (OTC). But
there are also active exchanges (CBOE, CME).
Focus on this course on forward and future contracts,
plain-vanilla call and put options.
But be aware (more on Advanced Derivatives):
Largest segment is interest rate derivatives (swaps).