Lecture 2 Flashcards
Forward Contracts
binding agreement (obligation) to buy/sell an underlying asset in the future, at a price set today
Fwd contract specifies
features and quantity of the asset to be delivered, the delivery logistics, such as time, date and place; the price the buyer will pay at the time of delivery
Call options
non binding agreement (right but not obligation) to buy an asset in the future at a price set today
Bermudan style option
can be exercised during specific periods
Payoff/profit of written call
Payoff = - max(0, S - K)
Profit = Payoff + future value of option premium
Payoff/profit of a purchased Call
Payoff = max(0, S - K)
Profit = Payoff - future value of option premium
Put option
gives the owner the right but not the obligation to sell the underlying asset
Long Forward - max loss and max gain
Max loss = Fwd Price
Max gain = unlimited
Purchased call - max loss and max gain
Max loss = FV(premium)
Max gain = Unlimited
Written put - max loss and max gain
FV(premium) - Strike price
FV(premium)
Short Forward - max loss and max gain
Unlimited
Forward price
Written Call - max loos and max gain
Unlimited
FV(premium)
Purchased put - max loss and max gain
FV(premium)
Strike price - FV(premium)
Long call strategy
insures against high price
short call strategy
sells insurance against high price
