lec04_01 - ECON 4721H Money and Banking Lecture 04_01...

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Unformatted text preview: ECON 4721H Money and Banking Lecture 04_01 Satoshi Tanaka University of Minnesota October 10, 2010 Satoshi Tanaka ECON 4721H Money and Banking Lecture 04_01 Financial Derivatives I Financial Derivatives: Options Satoshi Tanaka ECON 4721H Money and Banking Lecture 04_01 Big Picture: Where We Are? Macro Factors ⇓ p = E [ mx ] , state contingent claims ⇓ Stocks, Bonds ⇓ Financial Derivatives Satoshi Tanaka ECON 4721H Money and Banking Lecture 04_01 Derivatives: De nition De nition (Financial Derivatives) Derivative is a nancial instrument whose value is derived from the value of an underlying asset Examples: Options: Stocks, Interest Rate Forward, Futures: Bonds, Exchange Rate Satoshi Tanaka ECON 4721H Money and Banking Lecture 04_01 Option De nition De nition (Option) A call (put) option is a contract between a writer and a holder where holder has a right to buy (sell) the stock at the excercise price on the maturity date (or before the maturity date for the case of American options). Satoshi Tanaka ECON 4721H Money and Banking Lecture 04_01 Option Terminology Key Elements Exercise or Strike Price: X Price: C ( t ) , P ( t ) Maturity or Expiration: T Stock Price: S ( t ) Discount Rate: 1 ( 1 + r f ) t ≈ exp (- r f t ) Satoshi Tanaka ECON 4721H Money and Banking Lecture 04_01 Stock Price and Exercise Price...
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