Unformatted text preview: agrees to receive delivery at a
Short - this is when a person sells a futures
contract, and agrees to make delivery. Futures differ from forward contracts in the
following respects: a. Futures are generally traded on an
b. A future contract contains standardized
c. The delivery price on a future contract is
generally determined on an exchange, and
depends on the market demands.
How does one make money in a futures
The long makes money when the underlying
assets price rises above the futures price.
The short makes money when the underlying
asset·s price falls below the futures price.
Concept of initial margin
Degree of Leverage = 1/margin rate.
Options- an agreement that the holder can buy
from, or sell to, the seller of the option at a
specified future time a certain amount of an
underlying asset at a specified price. But the
holder is under no obligation to exercise the
contract. The holder of an option has the right,
but not the obligation, to carry out the
agreement according to the terms specified in
the agreement. Features of options
An option is a security, just like a stock or bond,
and is a binding contract with strictly defined
terms and properties.
Option Premium: Premium is the price paid by
the buyer to the seller to acquire the right to buy
or sell. It is the total cost of an option. It is the
difference between the higher price paid for a
security and the security's face amount at issue.
The premium of an option is basically the sum
of the option's intrinsic and time value. Call option: An option contract giving the
owner the right to buy a specified amount of
an underlying security at a specified price
within a specified time. Put Option: An option contract giving the owner
the right to sell a specified amount of an
underlying security at a specified price within a
specified time Swaps
An agreement between two
parties to exchange one set of
cash flows for another. In
essence it is a portfolio of
forward contracts. While a
forward contract involves one
exchange at a specific future
date, a swap contract entitles
multiple exchanges over a
period of time. The most
popular are interest rate swaps
and currency swaps. Features
Swaps are generally customized arrangements between
counterparties to exchange one set of financial obligations for
another as per the terms of agreement. The major types of swaps
are currency swaps, and interest rate swaps, bond swaps, coupon
swaps, debt equity swaps.
The only Rupee exchanged between the parties are the net interest
payment, not the notional principle amount.
The value of the swap will fluctuate with market interest rates.
If interest rates decline fixed rate payer is at a loss, If interest
rates rise variable rate payer is at a loss. Conversely if rates
rise fixed rate payer profits and floating rate payer looses. Swaptions
Swaptions are options on swaps. It is an option that
entitles the holder the right to enter into having
calls and puts, Swaptions have receiver
Swaptions (an option to receive fixed and pay
floating) and a payer Swaptions (an option to pay
fixed and receive floating). What do derivatives do?
Derivatives attempt either to minimize the
loss arising from adverse price movements of
the underlying asset
Or maximize the profits arising out of
favorable price fluctuation. Since derivatives
derive their value from the underlying asset
they are called as derivatives. How are derivatives used?
Derivatives are basically risk shifting instruments.
Hedging is the most important aspect of derivatives
and also their basic economic purpose
Derivatives can be compared to an insurance policy.
As one pays premium in advance to an insurance
company in protection against a specific event, the
derivative products have a payoff contingent upon
the occurrence of some event for which he pays
premium in advance. What is a Hedge«?
To Be cautious or to protect against loss.
In financial parlance, hedging is the act of
reducing uncertainty about future price
movements in a commodity, financial
security or foreign currency .
Thus a hedge is a way of insuring an
investment against risk.
Thank you ««...
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- Fall '13
- Derivative, Derivatives Market