Derivatives Market Flashcards
What are derivative instruments?
Those whose value derives from others, that is from instruments known as the underlying instrument.
How is the risk from derivative instruments?
Higher than the one from the underlying asset due to multiplier and leveraging effect
What can you say about the derivatives market?
That is the organized market only short-term derivatives are traded, that it is a zero-sum game
What is the standardization of a contract?
In the derivatives market is a way to define the variables regarding it, also to provide with liquidity to the contracts traded, and it also works against specialisation.
How is standardization evident?
Futures and options have a small number of maturity with specific dates, standard amount per contract, market rules, the possibility of closing a position before maturity and the existence of the Clearing House
What is an call option?
An instruments that gives the right to buy a certain amount of an instrument on a certain date in the future, at a price agreed today.
What is a put option?
An instruments that gives the right to sell a certain amount of an instrument on a certain date in the future, at a price agreed today.
In the case of being the buyer of a call option…
You would like to excercise your right to buy only is the selling price is higher than the strike price
In the case of being the seller of a call option…
You would like that the selling price would continue lower than the strike price as you benefit from the premium as the buyer won’t excercise its right
In the case of being the buyer of a put option…
You would excercise your right to sell if the selling price is lower than the strike price
In the case of being the seller of a put option…
You will benefit of the premium as long as the option holder does not excercise the right to sell, which means you won’t need to buy, so you prefer the selling price being smaller than the strike price
What is the premium of an option?
The price paid by the purchaser to the seller
What are the known variables that vary the valuing of an option?
The price of the underlaying asset, the strike price, the interest rate and the remaining maturity
What are the unknown variables that vary the valuing of an option?
Dividends and future volatility
What is a future?
Is a foward traded contract in an organized market, where the parties agree the sale of a specific amoun of.a security on a pre-determined date in the future, at a previously agreed price
