Chapter 10 Test 2 Flashcards
What is a derivative security?
An agreement between two parties to buy or sell an asset at a set price on a future date
What do derivative security values depend on
Its value depends on another asset ( like a stock or bond)
-if the assets price changes, the derivatives value also changes
what is a forward contract
An agreement to exchange set amount of assets on a future date at a set price
what are major foward market participants
Commercial banks, investment banks, and broker dealers
-they act as broker or counterparty
-risk of default exists
- no exchange clearinghouse
what are characteristics of fowards contracts
-customized and traded privately
- no daily adjustments, settled at the end of the contract
-higher risk of one party not fulfilling the contract
-flexible but riskier
What is a futures contract
agreement to exchange a set amount of assets on a future date and for a set price
Characteristics of futures contract
- safer because a clearinghouse guarantees both parties wont lose money due to default
- prices are updated daily to match the current market value ( marked to market)
- ensures that gains and losses are settled regularly, reducing risk.
What is the leading futures marketplace
The CME Group ( Chicago Mercantile Exchange
Floor brokers
handle trades for the public
Professional traders
trade for themselves
Position traders
hold investments for a long time, expecting prices to rise or fall
Day traders
buy and sell within the same day, closing positions before the market closes
Scalpers
make very quick trades, sometimes within minutes, to profit from small price changes.
whats difference between long position and short position
long position: means buying a futures contract
Short position: selling one
what are ways to exit (liquidate) a futures contract
-sell or buy back the contract (liquidate it) before it expires
- hold it until expiration and settle it ( either physically or in cash)
Speculators
trade to make a profit from price changes
Hedgers
use futures to protect against price fluctuations
arbitrageurs
take advantage of price differences between markets to make risk free profit
What is an Option
A contract that gives the holder the right, but not the obligation, to buy or sell the underlying asset a specified price within a certain time.
what is a call option
It gives the purchaser (buyer) the right to buy an underlying security(stock) at a certain price called the (exercise or strike price)
Whats it called when the buyer pays a fee to the seller
call premium(c)
What is put option
when the buyer has the right to sell the asset at a fixed price
buyer pays a fee to the seller called ( put premium)
What is the CBOE
Chicago board of operations exchange is the first exchange devoted soley to the trading of stock options
what are the different option types
American option: can be exercised at any time before (and on) the expiration date
European option: can be exercised only on the expiration date
