derivatives Flashcards
where are derivatives traded?
organised markets (exchanges): options and futures
over-the-counter: forwards, swap, exotic options
what are derivatives?
a financial contract whose value is derived from the price fluctuation of another asset (underlying asset)
in derivatives, what is the leverage?
it allows significant exposure to the underlying asset without full upfront payment, amplifying both gains and losses
in derivatives, what is the collateral?
security deposited to mitigate risk of default
why are derivatives a zero-sum game?
since the gain of one party is offset by the loss of another (no net value created)
derivatives serve only to transfer market risk from a counterparty to another
true or false: call holders profit from increases in the price of the underlying asset
true
is a buyer of an insurance a buyer of a call option or a put option?
put
how does the increase in the current value of the underlying asset impact the value of a call option and put option?
call: increases
put: decreases
how does the increase in the risk free rate impact the value of a call option and put option?
call: increases
put: decreases
how does the increase in the strike price impact the value of a call option and put option?
call: decreases
put: increases
how does the increase in the dividend on the underlying impact the value of a call option and put option?
call: decreases
put: increases
how does the increase in the time to expiration impact the value of a call option and put option?
call: increases
put: increases
how does the increase in the variance of the underlying impact the value of a call option and put option?
call: increases
put: increases
what are futures and forwards?
agreements to buy or sell an underlying asset at a certain date and at a certain price fixed in advance
where are future contracts traded?
exchanges
where are forwards traded?
OTC market
what is the contract price (futures/forwards)?
price to be paid by the buyer at the time of delivery, aka future/forward price
who is the long position in futures/forwards?
an investor that agrees to buy the underlying asset for a certain price at a certain time in the future
who is the short position in futures/forwards?
an investor that agrees to sell the underlying asset for a certain price at a certain time in the future
what is the difference in costs between futures/forwards and options?
it costs nothing to enter into a futres/forwards contract (except for margin requirements), while there is an option premium for options
what is the payoff of a long position (futures)?
spot price at expiration - contract price
what is the payoff of a short position (futures)?
contract price - spot price at expiration
