Reading #57 - Intro for Derivs Flashcards Preview

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Flashcards in Reading #57 - Intro for Derivs Deck (14):
1

define over-the-counter

dealer market with no central location

2

define forward commitment

"legally binding promise to perform some action in the future. they include forward contacts, futures contracts, etc"

3

define contingent claim

"claim to a payoff that depends on a particular event" - ex. options

4

define forward contract

"one party agrees to buy and the counterpart to sell at a specific price on a specific date in the future"

5

define futures contract

standardized and exchange-traded forward contract.

6

difference between fwd and futures contract

futures are backed by a clearing house and traded on a secondary market

7

define swap

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

8

define call option

option to buy an asset at particular price

9

define put option

option to sell an asset at a particular price

10

define credit derivative

"contract that provides bondholder with protection against downgrade/default by borrower"

11

example of credit derivative

CDS - credit default swap or Credit spread option

12

define credit spread option

"call option is based on bond's yield spread against a benchmark"

13

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

14

define law of one price (type of arbitrage)

"two securities or portfolios that have identical cash flows in the future, regardless of future events, should have the same price"