Lecture 8: Derivatives Flashcards Preview

MOS 1023 Final > Lecture 8: Derivatives > Flashcards

Flashcards in Lecture 8: Derivatives Deck (36):
1

What are derivatives?

derive all or part of their value from another security

2

Why do derivatives exist?

1. They are actively traded
2. They allow for more investment opportunities
3. lower cost
4. Increase leverage: returns are magnified

3

What are options

options are sold to give you an option of buying something else

4

What are call options?

you have bough the ability to call (buy) the option

5

What are put options?

you have bought the ability to sell the option

6

What is the exercise price?

the amount that you buy each share for
(ex. $1 for 100 shares)

7

What is the option premium?

Is the amount that you buy the option to buy the shares for

8

What is the expiration date? And what are the 3 kinds?

the last date that the option can be exercised
1. American
2. European
3. Bermudan

9

What is an American expiration date?

you can buy the exercise any dat within the time frame

10

What is the European expiration date?

you can only buy the option on a special day

11

What is the Bermudan expiration date?

you can buy the option on 1+ specific days of a time frame

12

What does the buyer and seller expect the price to do in a call option?

buyer: expects the price to increase (bullish)
seller: expects the price to decrease (bearish)

13

What does the buyer and seller expect the price to do in a put option?

buyer: expects the price to decrease (bearish)
seller: expects the price to increase (bullish)

14

What are the two types of trading options?

1.ME
2. CBOE -chicago board options exchange

15

What does options trading do?

facilitates offsetting positions through a clearing corporation

16

What happens to the call and put option in the "in-the-money" option?

Call: S>E
Put: E>S

17

What happens to the call and put option in the "out-of-the-money" option?

Call: E>S
Put: S>E

18

What factors affect prices?

Stock price
Exercise Price
Time and Maturity
Stock Volatility
Interest Rates
Cash Dividend

19

What is a right?

You have the right to purchase a number of shares on a specific time and price (few months)

20

Is a right transferrable or detachable?

transferrable

21

What is a warrant?

you have the warrant to purchase a number of shares at a specific time and price (within years)

22

What is a warrant usually attached too?

debt

23

What is spot or cash market?

price refers to immediate delivery

24

What is forward market?

price refers to delayed delivery

25

What is future market?

set features for delivery

26

What are 2 characteristics of a future market?

1. A place where investors can trade with one another
2. performance is monitored by a clearing house

27

What are 2 types of future markets?

1. commodities (agriculture, metal, energy)
2. financials (currencies, debt)

28

What are future exchanges?

they are nonprofit, voluntary places where future contracts are traded with established rules

29

What is a clearing corporation?

a corporation associated with exchange (mediator)

30

What is the short position?

seller that commits a trader to deliver at contract maturity

31

What is long position?

a buyer that commits a trader to purchase an item at contract maturity

32

What is a future margin?

good faith deposit between a buyer and seller usually being a less than 10% initial

33

When do margin call? and what is then to happen?

when price goes against investor

- deposit cash or close account, make marked to market daily or withdraw profit

34

What is a maintenance or variation of a future margin contract?

where the investor's net equity cannot drop below

35

What are hedgers?

are people that need or have the commodity. they watch their ass buy purchasing futures to offset risk

36

What are speculators?

these are people that are just looking for a quick buck. they absorb X/S demand generated by hedgers and assume the risk that hedgers avoid