derivatives- midterm 1-6

derivatives

they don’t exist on their own, their value is derived from some underlying asset

forwrad contract

agreement where you agree on a price today for a transactionbuyer bene in the future

options

gives the owners the right but not obligation, to buy or sell an asset at a given price, during. afixed period of time

option premium

holder has the right to walk away and to compensate the seller for this value

short call (seller’s perspective)

seller or writer of the call option has sold the right to buy an asset at a given price; if buyer exercises right then writer obligated to sell

uncovered call (naked call)

you sell the right to buy stock, but you don’t actually have any of the stock;

as the seller, you want the underlying asset to go up

because the lower the price goes, the costlier the contract becomes for the writer

forward contract transactions consist of

buyer making payment to seller and seller transferring asset to buyer

outright purchase

both the payment and transfer take place simultanesously today

fully leveraged purchase

payment made with borrowed funds; transfer is made today, but the payment is made in the future

prepaid forward

payment made today but transfer is made in the future

forward

both the payment and transfer take place simultaneously in the future

futures

serve same purpose as forwards; standardized with respect to size and delivery date; and settled daily

margin call

if margin balance falls below the maintenance margin

forward rate agreements

allow us to set a rate today for a loan for the future