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Derivatives (2) (Differences between futures/forwards (Exchange-traded/…
Derivatives (2)
Differences between futures/forwards
Exchange-traded/ OTC
Standardised/ tailored
Clearing house guarantee (no credit risk)/ Credit risk
Margin/ usually no margin
Delivery date usually period within specified month/ exact date specified
Usually closed out/ delivered
Quoted/ not quoted
Differences between options/ futures
Holder has option, writer has obligation/ both parties committed to trade
Writer deposits margin, buyer doesn't/ both parties deposit margin
Buyer pays premium to writer/ no money exchanged upfront
Standardised strike price/ traders negotiate delivery price
Payoff from a forward contract
long position
St -K
short position
K- St
Payoff expressions for call options
long position
max[St-K,0] - p
short position
-max[St-K,0] + p
Payoff expressions for put options
long position
max[K-St,0] - p
short position
-max[k-St,0] + p