ch10 - Chapter 10 Derivatives Risk Management with Forwards...

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Chapter 10 Derivatives: Risk Management with Forwards, Futures, and Swaps
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Derivatives A derivative is an investment whose value today or at some future date is derived entirely from the value of another asset, known as the underlying asset. Examples of derivatives Forwards and futures Swaps Options Forward, futures, and swap contracts are zero-cost instruments. 10 - 2
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10 - 3 Trading of derivatives Derivatives can be traded on an organized exchange, which is usually the case for futures and options. Derivatives can also be traded as private contracts, as is the case of forwards and swaps.
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Traded Security A traded security is defined as any asset that is held solely For investment purposes. Underlying Asset (source of uncertainty) Derivative Traded security ? Stock Option on stock Yes Gold Futures on gold Yes January temperature in central FL. Futures prices on frozen orange juice No If the underlying asset is a traded security, a perfect tracking Portfolio approach can be used to price the derivative. 10 - 4
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