Flashcards
Chapter 12 : options and derivatives
Cards in this deck (10)
- 1What is a derivative? (derive from asset)A financial instrument in which the price value is derived from an asset/security
- 2What are the four types of derivatives?1) Forwards
2) Futures
3) Swaps
4) Options - 3What is the 2 main difference between a future and a forward contract?1) Forward contracts are private - between seller and buyer to buy or sell an asset a particular date/price
2) There is some credit risk involved with a forward (someone is going to lose)
In futures - it takes place anonymously at an exchange
There is zero credit risk as its publically facilitated by the exchange
Future contracts are standardized - 4What are swaps and what's its main purpose?Swaps are agreements between two parties to exchange a sequence of cash flows
Primarily used by large corporations to offset mismatches of assets and liabilities ( e.g. - banks engage in interest swaps for their loans and deposits) - this helps to even out its cash flows
Swaps usually take place at the OTC markets between private parties - 5What are options? What are its characteristics?Options are a derivative in which buyers pay a premium to buy or sell securities/assets for a specific price at a specific time. The difference over here is that buyers or the seller has the option to buy/sell at the strike price if they wish to do so
Because of this option, sellers often charge a premium for this derivative - 6What's the difference between the call option and a put option?1) Call option - an option to buy for a specific price
2) Put option - option to sell for a specific price - 7What is the difference between out of the money vs. in the money?a) Out of the money - when the current stock price is less than the call option price (you can't execute)
b) In the money - when the current stock price is higher than the call option price (you can execute the contract) - 8What's the difference between European vs. American Options?1) European - can only execute the option at a particular date
2) American - can execute at any time up until expiration - 9What are the 5 variables that influence an option's price?1) Stock Price (So)
2) Exercise Price (X)
3) Risk free interest rate (rf)
4) Time
5) Volatility - 10How would an increase in the following five variables affect the stock price?
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- Flashcards on Chapter 12 : options and derivatives , created by Prashanth Martin on 16/08/2016.
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- Prashanth Martin
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