Exam 1 Flashcards
Derivatives
a financial instrument whose return is derived from the return on another instrument
Forward Contract
contract between two parties for one party to buy something from the other party at a later date at a price agreed upon today
Futures Contract
contract between two parties for one party to buy something from the other party at a later date at a price agreed upon today subject to the daily settlement of gains and losses and guaranteed against the risk that either party might default
Swaps
contract in which two parties agree to exchange a series of cash flows
Underlying Asset
a derivative derives its value from an underlying asset
Market Efficiency
theoretical fair value
Efficient Market
market in which the price of an asset equals its true economic value
Arbitrage
a type of profit seeking transaction where the same good trades at two prices
Risk Management
setting risk to an acceptable level
Call Option
the right to buy an underlying asset on a future date at a price fixed today
Put Option
the right to sell an underlying asset on a future date at a price fixed today
American Options
can be exercised anytime until the expiration
European Options
can be exercised only on expiration date
Open Interest
position is not closed or the option is not exercised
Time Decay (of an option)
closer you get to expiry, the more decay there is
