3/9 Class

Question 1

teacher is alive!!!

Answer 1

:)

Question 2

derivatives

Answer 2

options:
land example
managers/salary/stock options - granted and may become valuable
stock market:
call - right to buy
put - right to sell
both are tradable up until expiration; shorter time - 3 months
straddle - riding both sides, pg 153
future market - originally commodities - traded on Future’s exchange

Question 3

call

Answer 3

right to buy

Question 4

put

Answer 4

right to sell

Question 5

swaps - pg 139

Answer 5

….

Question 6

what can be the underlying assets?

Answer 6

stocks
bonds
mortgages/loans
currencies
eurocurrencies
interest rates
indices(index)
indicators(weather)

Question 7

counterparties

Answer 7

long(buyer)

short(seller)

Question 8

futures

Answer 8

see exhibit 5.2 pg 141

Question 9

forward

Answer 9

it is a contract - arrangement made off the exchange(OTC)
long buys asset from short in future at set “forward” price. (same as a commodity future, except it is OTC, not on a physical exchange.)
an MNC will use forward and futures to buy currency at a future date in order to pay payables or invest in projects when funds are needed

Question 10

NDF(non - deliverable forwards)

Answer 10

just settle the difference not the entire sum, pg. 139

Question 11

option arrangements

Answer 11

it is not a contract, it is the right but not the obligation to buy or sell the underlying asset
option price is arranged, just like a future. That is the strike price.
An MNC uses this if they wan to be able to get out, or not be locked into a prearrangement

Question 12

forward pricing

Answer 12

F=forward price
S - spot price
t = time
r = domestic interest rate
r*= foreign interest rate

Question 13

price formula

Answer 13

F = S[(1+r)/(1+r)]^t