term1 Definition1term2 Definition2term3 Definition3
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Future - buyer agrees to pay a predetermined amount for the delivery at future date and seller agrees to deliver the asset at in exchange for money
Long - buyer
Short - seller
Open - the initial trade
Close - the assets don’t end up being delivered
Covered - seller of the future has the underlying asset to exchange
Naked - seller doesn’t have the underlying asset needed for exchange when contract made. Could be unlimited risk
Options - gives the buyer the right, but not the obligation, to buy or sell an asset at a predetermined price on or before a prespecified date / between two
Difference between future & option = option gives the right to buy or sell whereas future is legally binding obligation
Call option - buyer has the right to buy the asset at the excersize price. Seller is obliged to deliver if excersized
Put option - the buyer has the right to sell the asset at exersize price. Seller of put option is obliged to take delivery and pay price if optioned
Sellers of options = writers
ET contracts = settled with a clearing house
Premium = money paid by buyer/holder to writer at beginning of option contract
Holder can only lose premium but profit is unlimited, writer’s loss is unlimited but can only profit the premium
ICE Futures Europe & NYSE Euronext - interest rates and bonds, equity indices (FTSE) & individual equities (HSBC)
Eurex = Frankfurt - german bonds futures & options. Also trades a range of products for European markets
ICE = worlds largest derivatives exchange - energy commodity contracts for crude oil, refined products, natural gas, power, emissions, futures and options on bonds, equities & indices
North America include - agricultural, currency & stock index futures and options
LME = futures and options contracts on range of metals - aluminium, copper, plastic etc
Adv - remove uncertainty of price & lack of supply
- hedge risk associated with portfolio or individual stock
- speculate on assets and price movements
Disad - unlimited losses
- thrive on price volatility, need lots of skills and experience
- counterparty party may default in OTC so need to do risk assessment
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