Please enable JavaScript.

Coggle requires JavaScript to display documents.

DERIVATIVES MARKETS (Forwards and futures markets (futures market…

- - - - unstandardized
      - direct contract between two parties
      - high credit risk
      - a specified delivery date
      - settlement at the termination of the contract
      - actual delivery of specified items on the specified date
    - - standardized
      - formal contract between each party and the future exchange
      - low credit risk
      - specific delivery dates
      - daily cash settlement of all contracts
      - almost all contracts are offset prior to delivery
  - - - try to reduce price risk inherent in their balance sheets or future business dealings by guaranteeing buying or selling prices for closely related future contracts
    - - take risks in the futures markets
      - they are willing to enter a futures transaction in hopes that the market price moves in a favorable direction
      - traders are a speial class of speculators
        
        who speculate on very short-term changes in prices
- - - - give buyer the right to buy a security or futures contract at the strike price
      - the writer agrees to sell at the strke price
    - - give the buyer the right to sell a security or futures contract at the strike price
      - the writer agrees to buy for the strike price
  - - - influence of the market price
        
        the higher the existing market rice of the underlying financial instrument relative to the exercise price, the higher the call option premium
        
        other things being equal
      - influence of the stock's Volatility
        
        the greater the volatility of the underlying stock, the higher the call option premium
        
        other things being equal
      - influence of the call option's time to maturity
        
        the longer the call option's time to maturity, the higher the call option premium
        
        other things being equal
    - - influence of the market price
        
        in contrast to "call option"
      - influence of the stock's volatility
        
        like " call option"
      - influence of the put otion's time to maturity
        
        like "call option"
- - - - people arrange exchanges forward in time
      - a forward contract
        
        involves two parties agreeing
        
        the buyer
        
        is said to have a long position
        
        the seller
        
        is said to have a short position
      - regulations
        
        two parties agreeing today on a price at which the purchaser will buy a specified amount of an asset from the seller at a fixed date sometime in the future
        
        both parities to the contract are bound by the contract and are not released from that obligation early unless they renegotiate the contract pior to its fulfillment
    - - like forward contracts
      - involve two parties agreeing today on a price at which the purchaser will buy a given amount of a commodity or financial instrument from the seller at a fixed dat sometime in the future
      - futures and forwards serve many of the same economic function but the markets for them are sufficiently different
    - - allow people to enter into contracts to buy or sell stocks, commodities or other securities at a predetermined price until some future time
      - an option buyer has the right to buy or sell, but not the obligation to buy or sell
      - the option buyer pays the option sellers an option premium
      - two types of options
        
        american-style option
        
        can be exercised at any time prior to and inclunding the expiration date
        
        european-style option
        
        can be exercised only on the expiration date
    - - involes two parties agreeing to exchange payment obligations on two underlying financial liabilities that are equal in pricipal amount but differ in payment patterns
      - a swap guarantees the exchange of two items of value between counterparties at some time in the future
      - a swap is usually arranged for only a net transfer of funds
      - the exact term of trade
        
        usually not pre-speccified
        
        they typically vary with interest rates exchange rates or some other future price
- - - - CBOE
      - CBT
      - CME
  - - - the phone and are usually between two financial institutions
      - between a F.I and one of its clients
    - - do not have to be those specified by an exchange
      - there is a small risk that the contract will not be honored
- - - - is an arrangement whereby one party exchanges one set of interest payments for another
    - - the notional pricipal value to which the interest rate are applied to determine the interest payments involved
      - the fiixed interest rate
      - the formula and type of index used to determine the floating rate
      - the frequency of payment,
      - the lifetime of the swap
    - - allowed both types of financial institutions to redue exposure to interest rate risk
    - - used by financial institutions and other firrms for speculative purposes
  - - - arrangements whereby currencies are exchanged at specified exchange rates and specified intervals