Lecture 5

Lecture 5 - Definitions: Derivative: value depends on...

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Definitions: Derivative : value depends on another variable Exchanges vs Over-the-Counter ( OTC ): BIS reports (in May 2005 for year ending December 2004) that OTC derivatives have notional value of $248 trillion while exchange-traded 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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Lecture 5 - Definitions: Derivative: value depends on...

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