Derivatives Flashcards
Financial instrument whose value is based on the value and characteristics of another (underlying) security. Created by two investors rather than an issuer of stock and bonds
Derivative
Two parties agree to exchange cash flows based on different financial instruments
Swap Contracts
One party agrees to pay a fixed interest rate, but will receive a variable rate of interest. The other party agrees to the exact opposite. Settled on a net basis, payments will be based on the difference between the fixed and floating interest rates
Interest Rate Swap
Can be created on foreign currencies, commodities, stock prices, interest rates, or even bond defaults
Swap Contracts
In return for assuming the obligation, the writer receives the _____ from the option buyer
Premium
Name of the underlying security, expiration month, exercise price, type and premium
Components of an option
An option will only have an intrinsic value if it is
In-the-money
Amount by which an option is in-the-money
Intrinsic value
Intrinsic Value + Time Value
Option Premium
Portion of an option’s premium that exceeds its intrinsic value
Time Value
Calls are in-the-money if the stock market price is
Above the strike price
Calls are out-of-the-money if the stock market price is
Below the strike price
Puts are in-the-money if the stock market price is
Below the strike price
Puts are out-of-the-money if the stock market price is
Above the strike price of the option
Intrinsic value of an option will either be a _____ amount or _____
Positive amount or zero
Premium associated with at- or out-of-the-money options will consist only of
Time Value
Premium - Intrinsic Value
Time Value