Chapter 14 & 15 Futures and Derivatives Flashcards
Forward contract
not standardized
not traded on an exchange
private agreement between 2 parties that are negotiated
Spot price
Cash price
Futures price
price of commodity at some time in the future
Intrinsic value of call
stock price minus strike - not less than 0
Intrinsic value of put
Exercise price minus stock price - not less than 0
Black Scholes Option Pricing Model
uses continuous time intervals to determine the value of a call option
Stock price - premium is greater for higher priced stocks
Exercise price - lower strike prices point to higher option value
Time to expiration - options with longer time to expiration are worth more
Volatility returns - greater volatility points to higher premiums
Rick free rate of return - call premium increases as risk free rate increases
Call option price goes up if Market price
goes up - direct relationship
Call option price goes up if exercise price
goes down - indirect relationship
Call option price goes up if time
goes up - direct relationship
Call option price goes up if volatility
goes up - direct relationship
Call option price goes up if risk free rate
goes up - direct relationship
Protective Put
Long position and long put to protect against downside risk
Protective call
Long call option, short stock to protect short seller against stock price increases
Collar
limits gains and losses with long put and short call - creates return within a band
Long straddle
Long put and long call both with same strike and expiration - useful is the price of the underlying security is likely to move up or down significantly but there is uncertainty about the direction
