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Derivatives - Coggle Diagram
Derivatives
Overview
Derivative is a financial security whose payoff is linked to another, previously issued security.
Derivatives involve the buying and selling, or transference, of risk.
In many derivatives, two parties agree to exchange a standard quantity of an asset (underlying assets) at a predetermined price at a specific date in the future
In theory, derivative trading should not adversely affect the economic system because it allows individuals who want to bear risk to take more risk, while allowing individuals who want to avoid risk to transfer that risk elsewhere.
Derivatives are leveraged instruments where participants put up a small amount of money and obtain the gain or loss on a much large position
Derivatives are used for speculation (Buying or selling a derivative contract in order to earn a leveraged rate of return) and for hedging (Entering into a derivatives contract to reduce the risk associated with positions or commitments in their line of business.)
Types
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A forward contract is an agreement to transact involving the future exchange of a set amount of assets at a set price.
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(1) Can be based on a specified interest rate (Example: LIBOR) rather than a specified asset
(2) Involve underlying assets that are non-standardized, because the terms to each contract are negotiated individually between the buyer and seller.
Future contract
A futures contract is an agreement to transact involving the future exchange of a set amount of assets for a price that is settled daily.
Futures contracts differ from forwards in that futures:
(1) are characterized by significantly less default risk.
(2) employ margin requirements and daily marking to market.
(3) margin requirement is a performance bond posted by a buyer and a seller of a futures contract.
Options
A contract that gives the holder the right, but not the obligation, to buy or sell the underlying asset at a specified price within a specified period of time.
(1) long / short -> contract (long position = buyer = holders, short position = seller = writers)
(2) put option / call option
-> underlying assets (give long positions the rights to sell / buy (or not) the underlying assets at strike P on pre-determined date
UNDER ANY CIRCUMSTANCES: short position must follow the decision of long position
(1) long put: mua hợp đồng quyền chọn bán (mua hợp đồng, có quyền bán / không bán TSCS)
(2) long call: mua hợp đồng quyền chọn mua (mua hợp đồng, có quyền mua / không mua TSCS)
(3) short put: bán hợp đồng quyền chọn bán (bán hợp đồng, có quyền bán / không bán TSCS)
(1) short call: bán hợp đồng quyền chọn mua (bán hợp đồng, có quyền mua / không mua TSCS)
TIPS: SẮC SẮC KHÔNG KHÔNG (có dấu thì là bán, không có dấu là mua)
TIPS: L - lên / S - xuống
Hedge: P increase -> long call / P decrease -> long put
Speculate: P increase -> long call / P decrease -> long put
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