FINA 4110 Slides 1 [Introduction]

FINA 4110 Slides 1 [Introduction] - Introduction Chapter 1...

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Introduction Chapter 1 1
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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 2
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Examples of Derivatives Futures Contracts Forward Contracts Swaps Options 3
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Futures Contracts z A futures contract is an agreement to buy or sell an asset at a certain time in the future for a certain price z 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) 4
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Exchanges Trading Futures z CBOT and CME (now CME Group) z NYSE Euronext z Eurex z z and many more (see list at end of book) 5
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Futures Price z The futures prices for a particular contract is the price at which you agree to buy or sell z It is determined by supply and demand in the same way as a spot price 6
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Electronic Trading z Traditionally futures contracts have been traded using the open outcry system where traders physically meet on the floor of the exchange z Increasingly this is being replaced by electronic trading where a computer matches buyers and sellers 7
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Examples of Futures Contracts Agreement to: z buy 100 oz. of gold @ US$1050/oz. in December z sell £62,500 @ 1.5500 US$/£ in March z sell 1,000 bbl. of oil @ US$75/bbl. in April 8
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Terminology z The party that has agreed to buy has a long position z The party that has agreed to sell has a short position 9
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z January: an investor enters into a long futures contract to buy 100 oz of gold @ $1050 in April z April: the price of gold $1065 per oz What is the investor’s profit? 10
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This note was uploaded on 03/03/2012 for the course FINA 4110 taught by Professor Liu during the Spring '11 term at CUHK.

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FINA 4110 Slides 1 [Introduction] - Introduction Chapter 1...

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