5 –The Purposes and Benefits of Derivatives a.Risk allocation, transfer, and managementb.Information discoveryc.Operational advantagesd.Market efficiency
Risk allocation, transfer, and management
Operational advantages Derivatives have lower transaction costs than the underlying Derivative markets also typically have greater liquidity Derivative markets increase the ease with which one can go short
Market efficiency • Derivatives increase the market efficiency
6 – Criticisms and Misuses of Derivatives 1. Speculation and Gambling 2. Destabilization and Systematic Risk
7 – Elementary Principles of Derivative Pricing 1.Storage2.Convenience Yield3.Arbitrage Law of one price An asset should be traded at same price even in different markets •What is the Definition of Arbitrage?•How does Arbitrage Contribute to Market Efficiency?
Practice Questions 4:
Practice Questions 5 :
Practice Questions 6:
Practice Questions 7 :
Practice Questions 8:
Practice Questions 9 :
Practice Questions 10:
Practice Questions 11:
Practice Questions 12:
Practice Questions 13:
You've reached the end of your free preview.
Want to read all 76 pages?
- Spring '20
- Derivative, Convertible bond