Csc- Chpt 10

Front 1

options vs forwards

Back 1

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

Front 2

common features of all derivatives

Back 2

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

Front 3

Derivative Markets

Back 3

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

Front 4

OTC vs Exhange traded Derivatives

Back 4

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-

Front 5

Types of underlying assets

Back 5

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

Front 6

Why do investors use derivatives?

Back 6

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

Front 7

American vs European style options

Back 7

ameican- exercised at any time up to and including the expiration date
euro- only on a set date

Front 8

LEAPS

Back 8

Long Term Equity AnticiPation Securities- LT option contracts, offer the same risks and rewards as regular contracts

Front 9

What can happen after opening a transaction?

Back 9

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

Front 10

in the money

Back 10

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

Front 11

out of the money
at the money

Back 11

call= underlying asset price is lowe then strike price
put= price of of the underlying asset is higher

Front 12

Time Value

Back 12

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

Front 13

option exchanges

Back 13

Montreal exchange- individual options, stock indexes, financial futures and ETFS
ICE- agricultural futures

Front 14

covered vs naked calls

Back 14

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

Front 15

cash secured put right

Back 15

writing a put (obligation to purchases) and seeting asid an amount of cash equal to the strike price

Front 16

cash settled futures

Back 16

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

Front 17

margin requirements for futures

Back 17

- 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

Front 18

making to market

Back 18

daily settlement of gaines and losses- asset price goes up, short pays the long, asset price goes down, long pays the short

Front 19

rights

Back 19

- 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)