Hull - Options, Futures, and Other Derivatives Flashcards
Review John C. Hull's book
What is a derivative?
A financial instrument whose value depends on the values of other underlying variables, usually prices of traded assets.
What are the two types of markets where derivatives are traded?
Exchange-traded markets and over-the-counter markets.
What is a forward contract?
An agreement to buy or sell an asset at a certain future time for a certain future price. A forward contract is traded in the over-the-counter market, usually between two financial institutions or an institution and a client.
What is a long position?
An agreement to buy an asset on a future date for a specified price.
What is a short position?
An agreement to sell an asset at a future date for a specified price.
What is a spot contract?
An agreement to buy or sell as asset today? (Spot traders are trading assets for immediate delivery in the spot market)
What is a futures contract?
An agreement between two parties to buy or sell as asset at a future date for a specified price. Unlike forward contracts, futures contracts are normally traded on an exchange.
What are the two types of options?
Call options and put options. Call options are the right to buy a certain underlying asset by a certain date for a certain price. Put options are the right to sell the same.
What is the price in a contract that creates an option?
The exercise price or strike price.
What is the date in the contract that creates an option?
The expiration date or maturity.
What are American options?
American options can be exercised anytime up to maturity.
What are European options?
European options can only be exercised on maturity.
Hedge funds: long/short equities
Purchase undervalued securities and short overvalued securities.
Hedge funds: Convertible arbitrage
Take a long position in a convertible bond combined with an actively managed short position in the underlying equity.
Hedge funds: Distressed securities
Buy securities issued by companies in ord close to bankruptcy.
