lecture 9- derivitives

Question 1

defintion of a derivative

Answer 1

an asset whose performanceis based on the behaviour of the value of an underlyingasset

• effective at limiting risk

Question 2

definition of an option

Answer 2

contract giving one party the right, but not the obligation, to buy or sell a financial instrument at a specified date and/or price

Question 3

what is an share option

Answer 3

share call option gives the purchaser a right, but not the obligation, to buy a fixed number of shares at a specified price at some time in the future

Question 4

what is a put option

Answer 4

gives the holder the right, but not the obligation, to sell a specific quantity of shares on or before a specified date at a fixed exercise price.

Question 5

what is a foward

Answer 5

ontract is an agreement between two parties to undertake an exchange at an agreed future date at a price agreed now

Question 6

what are futures

Answer 6

agreements between two parties to undertake a transaction at an agreed price on a specified future date

standardised legalised requirements –> clearing house is the formal counterparty to every transcation –> you are commited to do it

Question 7

what is the margining system which clearing house operates on

Answer 7

0.1 per cen tto 15 per cent of the value of theunderlying