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Derivatives
Fichas del conjunto (32)
- 1What are derivativesderive their value over time from the performance of an underlying asset:
equities,bonds,commodities; - 2Derivatives continuedtraded between two parties subject to preagreed set of terms and conditions that determine rights and obligations
- 3how are derivatives tradedexhange traded
over the counter - 4exchange tradedcounterparties are holder and exchange;
standardised contracts traded on a recognised exchange;
contract terms non-negotiable and available publicly - 5over the countertraded off exchange with specific conditions between the buyer and seller ; more illiquid;
forward contracts and swaps - 6Optionsright to purchase something at a preagreed strike price at some point in the future.
right is not obligation as the buyer can allow the contract to expire and walk away - 7Call Optionsbuyer has the right to buy asset at strike rate at future date
Seller ;
A seller has the obligation to sell the asset at the strike price if the buyer exercises the
option. - 8Put OptionsA buyer of a put option has the right, but not the obligation, to sell the asset at the strike price at a
future date. A seller has the obligation to repurchase the asset at the strike price if the buyer exercises the
option. - 9Futuresexchange traded contracts for predetrmined asset to be delivered at a pre-agreed point in future at a price agreed today
- 10what is option premiumPremium paid by the option buyer to the options seller is called Option Premium
- 11what is exercise price or exercise datepredetermined price in Option is the exercise price;
predetermined future date is called exercise or expiration date - 12Example : Put optionpurchased Infy stock : Rs.3250 on 18 July 2014
Dec 2014 : price : rs.4500
suppose you want to protect the capital appreciation;
buy a put option on infy for Jan at Rs.4500 and protect capital appreciation;
on other hand if stock rises to rs.4800,you can enjoy the capital appreciation as well, as there is no obligation on your part - 13Example : Call option3-month call option on Asian paints at Rs.600 expiring sep 2014.
If stock price rises to rs.1000 as predicted, by your father!!!,
this gives the right to buy stock at rs.600 using the call option and sell same at rs.1000 - 14what is american and european optionsoption exercisable at any point of time upto exercise date is called american option
option exercisable only on exercise date is called european - 15Summary of options contractsrepresents a claim or right on an underlying asset
right could be for purchase or sale of asset
assets include physical or financial assets
Right to be exercises within or specified date
Price nad other terms of contract are to be specified
Buyer has a premium to Seller
Rights and Obligations of the Buyer and Seller are not matched, a unique feature of the Options contract
Buyer always has the right to buy or sell asset without any obligation
Seller has obligation to buy or sell asset without any rights - 16BAsed on exercise price: Options are classified asAt-the-money
IN-the-money
Out-of-money - 17What is At-the-Money optionIf current market price and option exercise price are equal it is called At-the-money option; If price moves upward, call option will start giving the money
- 18In-the-money optionIf current market price is more than call option exercise price, it is called In-the-money option
If the call option is exercised immediately after purchase, the holder of option will get positive cash-flow. however this will be factored in computing the price of option that seller would expect to pay
For in-the-money put option, current option is lower than exercise price - 19Out-of-money optionif current market price is less than call options exercise price such options are called Out-of-Money call options
reason is that the holder of the option has to wait for sometime for the market to move upward to reach the exercise price and attain the positive cashflow.
For put option, if current market price is more than exercise price, it is called out-of-money put option - 20example: in-the-moneyFor example, if John buys a call option on ABC stock with a strike price of $12, and the price of the stock is sitting at $15, the option is considered to be in the money. This is because the option gives John the right to buy the stock for $12 but he could immediately sell the stock for $15, a gain of $3. If John paid $3.50 for the call, then he wouldn't actually profit from the total trade, but it is still considered in the money.
- 21What is option valuation?Computation of the fair option premium that needs to be paid to get the Option
- 22value of call option increases with ________ in time period (time to expiration)increases ;
reason is when the risk coverage period increases risk premium to be paid also increases - 23If a call option is expiring tomorrow what would be its valueclose to zero
- 24what happens to the value of call option when the volatility increases?Increases the option value;
(because increase in the uptick and downtick increases the range ; hence the option value) - 25as interest rate increases , call option value ______increases ; due to increase in p
- 26as stock price increases , call option value _________increases
- 27Increase in strike price_______call option premiumdecreases call option premium
- 28Increase in dividend _____________call option premiumdecreases
- 29binomial modelCo = p*Cu + (1-p)*Cd / (1+r)
- 30difficulties with binomial modelif period is longer, say 30 days, difficult to implement
- 31Black-Scholes ModelC =
S*N(d1) - E*exp(-rt) * N (d2) ;
C = call value
S = current market price
r = risk-free rate
t = time to expiration
E = exercise price
N(d) = cumulative normal probability density function
d1 = {ln(S/E) + (r+.5VAR)*t} / {SD*Sqrt(t)}
d2 = d1 - {SD*Sqrt(t)} - 32what does N(d1) and N(d2) represent?likelihood that owner of the options will get an positive cash flow at exercise
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- A-Level Investments Fichas sobre Derivatives, creado por Mukundhan Srinivasan el 24/07/2016.
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- Mukundhan Srinivasan
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