Chapter Ten Derivative Securities Markets

These flashcards cover key concepts of derivative securities, including definitions of different contracts and their features.

Derivative Security

An agreement between two parties to exchange a standard quantity of an asset at a predetermined price at a specified future date.

Payoff

Linked to another, previously issued security; it changes as the value of the underlying security changes.

Spot Market

A market where the immediate exchange of assets and funds takes place; characterized by the delivery versus payment principle.

Forward Contract

An agreement to exchange a set amount of assets at a set price at a future date.

Futures Contract

An agreement to exchange a set amount of assets for a price that is settled daily, traded on an organized exchange.

Margin Call

A request from a brokerage for more funds to be added to maintain the margin requirement due to losses.

Option

A contract that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price.

Call Option

An option that gives the purchaser the right to buy an underlying security at a specified price.

Put Option

An option that gives the buyer the right to sell an underlying security at a specified price.

Black-Scholes Model

A model used to price and value options based on several factors affecting the option's price.

Swap

An agreement between two parties to exchange a series of cash flows for a specific period of time.

Caps, Floors, and Collars

Derivatives that help hedge interest rate risk; a cap is a call option on interest rates, a floor is a put option, and a collar combines both.

Credit Default Swap

A type of credit swap that provides insurance against the risk of default on a loan.