Book 4_Derav_READING 69_FORWARD COMMITMENT AND CONTINGENT CLAIM FEATURES AND INSTRUMENTS Flashcards
Forward contracts
obligate one party to buy, and another to sell, a specific asset at a specific price at a specific time in the future
Futures contracts
are much like forward contracts, but are exchange-traded, liquid, and require daily settlement of any gains or losses (mark-to-market)
A call option
gives the holder the right, but not the obligation, to buy an asset at a specific price at some time in the future
A put option
gives the holder the right, but not the obligation, to sell an asset at a specific price at some time in the future
In an interest rate swap
- one party pays a fixed rate and the other party pays a floating rate, on a given amount of notional principal
- Swaps are equivalent to a series of forward contracts based on a floating rate of interest
A credit default swap
is a contract in which the protection seller provides a payment if a specified credit event occurs.
Call option value at expiration is
Max(0, underlying price minus exercise price) and profit or loss is Max(0, underlying price minus exercise price) minus the option cost (premium paid).
Put value at expiration is
Max(0, exercise price minus underlying price) and profit or loss is Max(0, exercise price minus underlying price) minus the option cost.
A call buyer (call seller)
benefits from an increase (decrease) in the value of the underlying asset.
A put buyer (put seller)
benefits from a decrease (increase) in the value of the underlying asset.
A call option writer or put option writer
The investor sell the option (seller)
A forward commitment
is an obligation to buy or sell an asset or make a payment in the future. Forward contracts, futures contracts, and most swaps are forward commitments.
A contingent claim
is a derivative that has a future payoff only if some future event takes place (e.g., asset price is greater than a specified price). Options and credit derivatives are contingent claims.
