Derivatives Flashcards
What make up options?
- Buyers and writers payoffs
- Calls and puts
- Using options to reduce risk
What is a derivative?
An asset who’s performance is based on the behaviour of an underlying asset
A derivative is “the legal right that becomes”:
An asset
An option contract gives one party the right to buy or sell a financial instrument, but not:
The obligation
When do you make profit when you buy a call option
If the price is higher than the option-specified price
What’s another term for the exercise price?
Strike price
What is a put option?
gives the holder the right to sell a specific quantity of shares on or before a specified date at a fixed exercise price
What’s a forward contract?
Agreement between two parties to undertake an exchange at an agreed future date at a price agreed now
What is a futures contract?
Agreements between two parties to undertake a transaction at an agreed price on a specified future date
What are some examples of forward contracts?
- Long position
- Short position
- Forward contracts are tailor made
- Over the counter instruments
What’s the difference between a forward and futures contract?
-Futures are exchange traded, forwards are off-exchange
