Chapter 1 Flashcards
Derivative
financial instrument where it is value is derived from underlying variable.
For example if you have an auction on a option the price stock derives it is value from the company itself.
Derivatives example: Forward contracts/ future contracts/ Options Contracts/ Swap Contracts
Variable of derivative can is a variable because it can be real asset or financial asset or event (amount of snowfell) or index
True
Derivatives can be exchanged traded or over the counter (OTC)
True
Exchange Traded are more standardized in comparison to OTC which are more customized
True
Exchange traded highly regulated in comparison with OTC because OTC needs more customized
True
Forwards
Agreement to buy and sell specific asset at a specific price at a certain future date.
The price is agreed on the present for the future
Forward vs Futures
Forward is OTC traded
Futures is exchange traded
In forward and futures both parties are obligated to perform but there is no cost to enter
True
Spot market
What you can sell and buy right now
No wealth is created in derivative market
for a buyer to win, seller must lose and vice versa
Payoff graphs in derivative market will always add up to zero
True, no wealth creation, just wealth transfer
Option
Derivative contract that gives the holder the right but not the obligation to buy or sell specific asset at specific time (expiration date) by a specific price (strike/exercise price)
Call option
Holder has the right to buy , other party has obligation to sell
Put option
Holder has the right to sell, other party has obligation to buy
American Style options
anytime trading - anytime exercise
