1) Introduction Flashcards
(12 cards)
What are Derivatives
A derivative is a financial product whose value is derived from the price or value of another product
What are drift and volatility in the context of underlying assets
Drift (µ) - is the expected percentage return on an investment over a certain period
Volatility (σ) - measures the uncertainty or variability of that return
What is a stock or share
A stock (or share) is a contract between a company and the holder that entitles the holder to a percentage of future dividend payouts. The market price at time t is usually denoted by Sₜ
What is a bond
A bond is a debt guarantee where the holder pays now in exchange for a guaranteed fixed payment in the future. Its market price at time t is usually denoted by Bₜ or B(t)
What is return on investment (ROI) and how is it calculated
Return on investment is the percentage increase in value over a time period
What is the continuously compounded interest rate and how is it expressed mathematically
How do you calculate the future value of an investment with continuous compounding
What is the market price
The market price is the maximum (or minimum) price at which someone else is willing to buy (or sell) a financial contract
What is a forward contract
A forward contract is an agreement where one party (long position) agrees to buy an underlying asset at a set price (F) at a future time (T), and the other party (short position) agrees to sell it at that price and time
What is a futures contract and how does it differ from a forward contract
A futures contract is a standardised forward contract traded on an exchange. The delivery price and date are set by the exchange, and the exchange ensures the contract is honoured. Unlike forwards, the two parties may not know each other
What is the futures price in a futures contract
The futures price Ft,T is the market-agreed purchase price at time t for delivering the underlying asset S to the holder at a future time T
How is the value of a forward contract at maturity calculated
