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Level 74

Derivative Markets


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derivative
financial contract between two people that has a value "derived" from the value of its underlying assest
spot price
price of the underlying asset at expiration
short position
one who is selling is said to be in _______
long position
one who is buying is said to be in _______
Credit risk
possibility that borrower will not meet the scheduled repayments and default on their loan
payoff
cash inflow
profit
payoff-AVIC
Long bond
is equivalent to lending money
short bond
is equivalent to borrowing money
Forward Contract
Contract that requires the exchange of an agreed-upon amount of a currency on an agreed-upon date at a specific exchange rate.
long forward position
has an obligation to BUY the underlying asset on the expiration date for the forward price
short forward position
has an obligation to SELL the underlying asset on the expiration date for the forward price
forward premium
F o,t / So
St-Fo,t
long forward payoff
F0,t-St
short forward payoff
annualized forward premium
S0 e^aT = F0,t
prepaid forward contract
forward contract in which the underlying asset is delivered at the expiration date but the contract is paid for at time 0
cash and carry
long underlying + short forward
Call Option
buying shares
Call Premium
amount in excess of par value that a company must pay when it calls a security
strike price
specified price of the option
exercise
spot price of the underlying asset at expiration is greater than the strike price then the owner of the call will
expire
spot price of the underlying asset at expiration is less than the strike price then the owner of the call will
option writer
option seller
Put Option
selling shares
Out of the Money
have no intrinsic value
In the Money
have intrinsic value
At the money
option's strike price is exactly equal to the price of the underlying security
Intrinsic value
economic or fair value of an asset; the present value of the asset's expected future cash flows.
long put
corresponds to short underlying
short put
corresponds to long underlying
cap
short underlying + long call
Covered Call
Strike = 50, Price = 250, Own stock, we gain as price goes up. We collect premium from option, but payout money to the owner as the price goes up, negating our gain from owning the stock.
covered writing
selling at option while having a position in the underlying asset
naked writing
selling an option while not having a position in the underling assest
floor
long underlying + long put
covered put
reverse put
reverse cash and carry
short underlying + long forward
put call parity
call-put= F^p o,t -Kv^t