47963892-financial-derivatives(1)

Futures contract and agrees to receive delivery at a

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Unformatted text preview: agrees to receive delivery at a future date 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 exchange. € b. A future contract contains standardized articles. € 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 contract? 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 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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This document was uploaded on 09/23/2013.

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