derivatives

Question 1

where are derivatives traded?

Answer 1

organised markets (exchanges): options and futures
over-the-counter: forwards, swap, exotic options

Question 2

what are derivatives?

Answer 2

a financial contract whose value is derived from the price fluctuation of another asset (underlying asset)

Question 3

in derivatives, what is the leverage?

Answer 3

it allows significant exposure to the underlying asset without full upfront payment, amplifying both gains and losses

Question 4

in derivatives, what is the collateral?

Answer 4

security deposited to mitigate risk of default

Question 5

why are derivatives a zero-sum game?

Answer 5

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

Question 6

true or false: call holders profit from increases in the price of the underlying asset

Answer 6

true

Question 7

is a buyer of an insurance a buyer of a call option or a put option?

Answer 7

put

Question 8

how does the increase in the current value of the underlying asset impact the value of a call option and put option?

Answer 8

call: increases
put: decreases

Question 9

how does the increase in the risk free rate impact the value of a call option and put option?

Answer 9

call: increases
put: decreases

Question 10

how does the increase in the strike price impact the value of a call option and put option?

Answer 10

call: decreases
put: increases

Question 11

how does the increase in the dividend on the underlying impact the value of a call option and put option?

Answer 11

call: decreases
put: increases

Question 12

how does the increase in the time to expiration impact the value of a call option and put option?

Answer 12

call: increases
put: increases

Question 13

how does the increase in the variance of the underlying impact the value of a call option and put option?

Answer 13

call: increases
put: increases

Question 14

what are futures and forwards?

Answer 14

agreements to buy or sell an underlying asset at a certain date and at a certain price fixed in advance

Question 15

where are future contracts traded?

Answer 15

exchanges

Question 16

where are forwards traded?

Answer 16

OTC market

Question 17

what is the contract price (futures/forwards)?

Answer 17

price to be paid by the buyer at the time of delivery, aka future/forward price

Question 18

who is the long position in futures/forwards?

Answer 18

an investor that agrees to buy the underlying asset for a certain price at a certain time in the future

Question 19

who is the short position in futures/forwards?

Answer 19

an investor that agrees to sell the underlying asset for a certain price at a certain time in the future

Question 20

what is the difference in costs between futures/forwards and options?

Answer 20

it costs nothing to enter into a futres/forwards contract (except for margin requirements), while there is an option premium for options

Question 21

what is the payoff of a long position (futures)?

Answer 21

spot price at expiration - contract price

Question 22

what is the payoff of a short position (futures)?

Answer 22

contract price - spot price at expiration