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Chapter 10
Fichas del conjunto (45)
- 1derivativesis a financial contract between two parties which its value is derived from or dependent on the underlying asset
- 2underlying assetes can bestocks - bonds - future contracts - currency - index and even interest rates
- 3because of the link between derivative and underlying assetholding derivative can be a substitute to holding underlying asset
- 4forward contractin forward contract both parties or obliged to trade the underlying asset at a specific price in the future
- 5with forward contracts …… is not requiredno upfront payment is required, smth the buyer pays a performance bond (required) or good faith deposit which provides more assurance to exercising the contract
- 6derivatives are a zero-sum gamemeaning a gain for a party exactly means to loss for the counter party in exact amount
- 7derivatives trade in bothOTC market and organized exchanges
- 8how can one offset a call optionby selling a call option with exact same features
- 9Default risk ( Credit risk)is a major concern in OTC derivative market and it’s the risk that one of the parties in contract can not meet its obligations
- 10Canadian Derivatives Clearing Corporationis responsible for clearing for the Montreal futures and option trades
- 11other than energy sector most commodity categories areexchange-traded derivatives
- 12interest rates derivativesare generally based on interest rate-sensitive securities, like bankers acceptance and government of Canada bonds
- 13hedgingA protective manoeuvre; a transaction
intended to reduce the risk of loss from
price fluctuations. - 14an option contract is a contract between two parties1. the buyer (AKA holder or long position)
2. Seller (AKA writer or short position) - 15Strike price or exercise pricein options is the price that underlying asset can be bought and sold in the future and it’s already determined when the investor enter the contract
- 16the only obligation the buyer of an option has ispaying options premium or option price, once it’s paid they don’t have anymore obligations
- 17what is option trading unitan option trading unit is the number of underlying assets in just one option contract. for stock options each contract represents 100 shares. for other options the number of underlying asset can be any amount
- 18American style optionsOptions that can be exercised at any time up to and including the expiry date. all options in North America are American style
- 19European style optionscan only be exercised at the expiry date, like most index options
- 20Long-term anticipation securityis simply a long-term option contract with the same features as regular options
- 21Intrinsic valuethe in-the-money portion of an option is called intrinsic value of the option. Intrinsic value is the value of certainty
- 22Intrinsic value formula= strike price - underlying asset price
- 23what is the intrinsic value for at the money and out of the money options?it’s always zero
- 24time value of optionis the value of uncertainty
- 25option time value formula.= option price - options’ intrinsic value
- 26open interesttotal number of outstanding option contracts that haven’t been closed or exercised.
- 27the most populate reason of buying call optionsprofit from an expected increase in underlying asset
- 28call options are primarily written because ofincome they provide in the form of premiums
- 29covered call and naked call writerscovered call writers own the underlying stock and use this strategy to meet their obligations.
naked call writers do not own the stock and their risk is unlimited - 30Married put or put hedgebuying a put while one owns the stock
- 31what is a futures contractwhen a forward is traded on an exchange it’s called futures
- 32forward agreementwhen a forward contract is traded on OTC
- 33cash-settled futuresmany underlying assets are impossible to deliver like an index futures. in this case the contract will be settle by paying the different in cash to the other party.
- 34margin requirement for futures contractsbuyers and sellers of futures contract must deposit and maintain adequate margin in their accounts while trade is open
- 35initial margin and maintenance margininitial margin is required when both parties enter a future contract
Maintenance margin is the minimum acc balance required while the trade is open - 36marking to marketin future markets settlements is done daily, at the end of each trading day gains and losses will be transferred between parties
- 37if an acc balance drops below maintenance balancethe acc holder must deposit funds to reach the initial margin (and not the maintenance margin)
- 38futures margin requirement are usueally3 to 10% of contracts value
- 39rights & warrantslike options are contract that give the buyer the right and not obligation of buying a stock
unlike options they are issued by the company for raising capital - 40rights and warrants expiry daterights are very short term - as little at 4 to 6 weeks
warrants are longer-term usually between3 to 5 years - 41what is offering price or subscription pricethe exercise price of a right which is always below market value
- 42intrinsic value of Rights during Ex-right period =S-X/n
S is market price
X excersice price
n number of rights needed to buy one share - 43Intrinsic value of rights during Cum-right period =S-X/N+1
- 44if common share of a company listed on TSX, the rights will beautomatically listed on TSX and tradable until expires (noon time on Expirt date)
- 45the main attraction of warrant is the …….-leverage potential
the price of a warrant is usually much lower than the underlying asset
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- Fichas sobre Chapter 10, creado por Saffar FX el 24/03/2024.
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