FIN4520-Chapter1

FIN4520-Chapter1 - NYSE Euronext Eurex...

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Introduction Chapter 1 1
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“All I can say is beware of geeks bearing formulas.” Derivative securities are “financial weapons of mass destruction.” Warren Buffett 2
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The Nature of Derivatives A derivative is an instrument whose value depends on the values of other more basic underlying variables. 3
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Examples of Derivatives Futures Contracts Forward Contracts Swaps Options 4
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Ways Derivatives are Used To hedge risks To speculate (take a view on the future direction of the market) To lock in an arbitrage profit 5
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Futures Contracts A futures contract is an agreement to buy or sell an asset at a certain time in the future for a certain price. Profits and losses are computed on a daily basis. By contrast, in a spot contract there is an agreement to buy or sell the asset immediately (or within a very short period of time). Settlement occurs at the end of the contract. 6
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Exchanges Trading Futures CBOT and CME (now CME Group) Intercontinental Exchange
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Unformatted text preview: NYSE Euronext Eurex BM&FBovespa (Sao Paulo, Brazil) and many more (see list at end of book) 7 Futures Price The futures price for a particular contract is the price at which you agree to buy or sell. It is determined by supply and demand in the same way as a spot price. 8 Electronic Trading Traditionally futures contracts have been traded using the open outcry system where traders physically meet on the floor of the exchange. Increasingly this is being replaced by electronic trading where a computer matches buyers and sellers. 9 Examples of Futures Contracts Agreement to: buy 100 oz of gold @ US$1050/oz in December sell 62,500 @ 1.5500 US$/ in March sell 1,000 barrels (bbl) of oil @ US$75/bbl in April 10 Terminology The party that has agreed to buy has a long position. The party that has agreed to sell has a short position. 11...
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FIN4520-Chapter1 - NYSE Euronext Eurex...

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