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Definitions:
Derivative
: value depends on another variable
Exchanges
vs
OvertheCounter
(
OTC
):
BIS reports
(in May 2005 for year ending December
2004) that OTC derivatives have notional value of $248 trillion while exchangetraded contracts
were (slightly down to) $46.6 trillion.
Forward contract
: agree to buy/sell a particular asset at given price and date/time.
Spot contract
: agree to buy/sell a particular asset at given price NOW.
S
t
is the value of some asset at time t (so S
0
is value at time zero, the beginning; S
T
is time at time
T, often expiration date)
F
t
is the value of some forward price at time t (the price at time t, of some asset to be delivered at
date T>t; sometimes for clarity denoted F(t,T) the value at date t, of an asset to be delivered at T.
For now we just take these prices as given: some trader or exchange tells us what the price is.
(This is equivalent to saying that the financial markets are perfectly competitive so that our
position will not affect the market price
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 Spring '12
 Poniachek
 Derivatives, Options

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