Flashcards in Reading #57 - Intro for Derivs Deck (14):
dealer market with no central location
define forward commitment
"legally binding promise to perform some action in the future. they include forward contacts, futures contracts, etc"
define contingent claim
"claim to a payoff that depends on a particular event" - ex. options
define forward contract
"one party agrees to buy and the counterpart to sell at a specific price on a specific date in the future"
define futures contract
standardized and exchange-traded forward contract.
difference between fwd and futures contract
futures are backed by a clearing house and traded on a secondary market
series of fwd contracts. one party agrees to pay short term rate of interest on a princ. amt. and counterparty pays certain (fixed) rate of int. in return
define call option
option to buy an asset at particular price
define put option
option to sell an asset at a particular price
define credit derivative
"contract that provides bondholder with protection against downgrade/default by borrower"
example of credit derivative
CDS - credit default swap or Credit spread option
define credit spread option
"call option is based on bond's yield spread against a benchmark"
What are the three benefits of derivatives markets?
provide price information, allow risk to be mnged and shifted amg party participants, and reduce transaction costs