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19 Cards in this Set
- Front
- Back
options vs forwards
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options- contracts between two parties, buyer has the right to buy or sell the option, seller is obligated
put option- purchaser has the right to sell call option- purchaser has the right to buy forwards- contracts between two parties where both parites are oblgiated |
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common features of all derivatives
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1. contractual agreement
2. expiration date- full obligations or excerise ight 3. price- for fowards.no upfront price is required, however sometimes there is a preformance bond or good faith deposit - buyer makse a payment to the seller (premium) 4. zero sum game- gains and losses are offset |
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Derivative Markets
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1. OTC- active, vibrant, custom deals, more complex
2. Exchange traded- floor or system, evolved because of issues of standardization, liquidity and credit risk Bourse de Montreal and ICE Futures |
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OTC vs Exhange traded Derivatives
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1. flexibility
2. privacy 3. liquidity and offsetting 4. default risk- major concern in OTC where as exhange traded has a clearing house CDCC 5. regulation- |
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Types of underlying assets
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1. Commodities- grains oilseeds, livestock, forest fibre, precious and industrial metals
2. Financials - explosive growth due to volatile interst rates, financial dereg, competition, globalization, breakthrough tech --> Equities, Interest rates (LIBOR, yeilds on TBILLS), Currencies |
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Why do investors use derivatives?
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1. Individual Investors-
2. Institutional investors (mutual fund, hedge fun, pension managers) - also use for speculation andrisk management as well as: market entry/exit, arbitrage, yeild enhancement 3. Corporations/Businesses- primarily used for hedging purposes 4. Derivative Dealers |
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American vs European style options
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ameican- exercised at any time up to and including the expiration date
euro- only on a set date |
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LEAPS
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Long Term Equity AnticiPation Securities- LT option contracts, offer the same risks and rewards as regular contracts
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What can happen after opening a transaction?
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1. Offsetting the position: long= selling the same type and number of securities
short= buying 2. Excerise the option= short person is assigned the option 3. expire worthless |
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in the money
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owners of optiosn only exercise when in the money
Call- exercise/strike price is below the price of the underlying asset Put- strike price (selling price) is above the price of the underlying asset |
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out of the money
at the money |
call= underlying asset price is lowe then strike price
put= price of of the underlying asset is higher |
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Time Value
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the more uncertaintity about where an option with be at experiation means greater time value
Prior to maturity most options trade above intrinsic value= this amount is time value option price= intrinsic value + time value |
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option exchanges
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Montreal exchange- individual options, stock indexes, financial futures and ETFS
ICE- agricultural futures |
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covered vs naked calls
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covered- person udnerwriting owns the stock and will use it to meet obligations if assigned
naked- do not own the udnerlying stock- know that they will only be called upon if market price is above strike price, therefore they hope that this difference is less then the premium paid |
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cash secured put right
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writing a put (obligation to purchases) and seeting asid an amount of cash equal to the strike price
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cash settled futures
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to difficult to deliver underlying assets so an excahnge of cash from one party to an antoher based on the preformance of the udnerlying asset (price agreed on in futures contract vs price of underlying asset) underlying asset is less- long pays short
underlying asset price gone up- short pays long |
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margin requirements for futures
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- purpose is to provide a level of assurance that obligations will be met
1. Initial Margin- 2. Maintenance Margin- minimun account balance *rates are set by the exchange it trades on |
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making to market
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daily settlement of gaines and losses- asset price goes up, short pays the long, asset price goes down, long pays the short
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rights
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- simular to options interms of no obligation
- shorter term. 4-6 weeks expiration exericise price is called the subscription or offering price record date= date that determines the list of shareholders receiving rights ex rights= two days b/f when stock trades without rights cum rights= announcement - ex rights date usually one right per share, certain number of rights needed to buy one share (plus sub price) |