Essay on Derivatives Exam 1 Study Sheet

Submitted By steven353
Words: 790
Pages: 4
Open Document
1. Intro to Derivatives

Derivative: instrument whose value depends on value of some other asset. Serve to provide Price Discovery (liquidity) and Risk Management (hedging)

Derivative Contracts are zero-sum, counterparty refers to other side of contract.

Notional Principal = value of underlying asset in derivative. More accurate…less meaningful. Based on actual cash flows of asset

Market value: based on price of contract.

E-mini futres most liquid security in world. Small leveraged contract of S&P.

Derivative uses: Heding, Speculation (leverage), change the nature of asset or liability arbitrage trading (Ex. When S&P stocks to not line up with S&P Futures).

Unlike Gambling, Derivatives do no CREATE risk.

Forward contract: agreement between buyer (long) and seller (short) to trade. Specified quantity, price, and time in future
Futures: forward contracts that are standardized, more heavily regulated, and trade on exchanges
Spot Price: what asset is worth now
Borrow rate: how much can I borrow
Time until delivery: time frame

Call option: Buyer pays premium (strike/exercise price) for the right to BUY an asset at or before maturity.

Put option: right to SELL an asset at a stated exercise/strike price on or before a stated maturity date.

Options sell for 100 shares standard.

2. Mechanics of Futures Markets

Spot market (normal) : agree today, pay today, deliver tomorrow
Forward: agree today, pay at maturity, deliver at maturity
Futures: agree today, mark-to-market everyday, pay spot at maturity, deliver at maturity

Forward contracts: t = start time
T = delivery time
Buyer = long ; Payoff is “St - K
Seller = short ; payoff is “K – St”
St = spot at time T
K delivery price

Futures contracts: same as ^ except more formalized and go through “Clearing house” and post daily gains, losses though “daily settlement”. Traded on Exchanges

Must state delivery. Where, what, when. Only 3% of contracts result in delivery

Margin:
Margin account: required to pay futures (“down payment”)
Initial margin needed as security deposit

FORMULAS:
Forward contracts pay off:
Buyer = long ; Payoff is “St - K
Seller = short ; payoff is “K – St”
Time value of money:
FV = CFe^(T in yrs * r)
PV = CFe^-(T in yrs * r)
# coupon payments = CF*(semiannual)(.5) ; B0 = #Coupe^(r*T) + …
Notation for pricing forward contracts
St = spot price at time (t=0 origination, t=T is maturity)
Ft = Futures or Forward price at time (recall… Ft=St)
K = Futures or forward settlement price agreed at origination (K=F0)
T = Maturity
R = Risk free interest for Maturity T
Vt = Value of contract at time t
DETERMINES FAIR PRICE IN FUTURE (arbitrage opportunities)
F0 = S0*e^r(T)
IF F0 > S0e6(rT) … arbitrage is possible guaranteeing positive payoff in SELLING
IF F0 < S0e6(rT) … arbitrage is possible guaranteeing positive payoff in BUYING
Long and short on underlying assets, doesn't’t matter if asset goes up or down, you
Show More

Related Documents: Essay on Derivatives Exam 1 Study Sheet

A Syllabus 801 Fall 2014 Essay

corporate financial methods with an emphasis on valuation. This will include valuation of real assets, securities, real options and derivative assets. The course should be useful to all graduate students preparing for careers that have at least some financial analysis component. Additionally, this course will serve as a solid foundation for further graduate study in finance, in particular, finance 852 (Financial markets and strategies) and finance 853 (Fixed income securities). Course Format:…

Words 1097 - Pages 5

Essay about Investment and Case Study Class

completion of or concurrent enrollment in FIN 286 (Valuation). There will be no exceptions to this policy. Required Materials: Students will be expected to have access to the following course materials on a continual basis throughout the entire semester: (1) Textbook: Investment Analysis and Portfolio Management 10e by F. Reilly and K. Brown (Cengage South-Western, 2012) (2) Supplementary Readings: As detailed in the Course Outline, in addition to formal assignments from the textbook there will also be…

Words 5860 - Pages 24

Case Study: Money And Capital Markets

....................................... 3 Textbook ............................................................................................................................... 3 Potential Harvard Business & UVA Darden Business Publishing Case Studies (HB) ..... 3 Other Material ..................................................................................................................... 3 Recommended Specialized News & Analysis Outlets: .................................................…

Words 2859 - Pages 12

Essay on module 4 PPA

PPA-1-ABBREVIATIONS CHART Abbreviation Letters Represent Context Definition or Application within the Patient’s Chart Source Document From Jane’s Dare Medical Record found on bottom of Medical Record pages… 1. ICD International Classifications of Diseases, Ninth Revision Published by WHO This is a systematic classification of diagnosis codes. These codes are numeric and alphanumeric codes that represent medical diagnoses ADMISSION SUMMARY 2. CM Clinical Modification This abbreviation…

Words 2321 - Pages 10

Sch4U Final Exam Study Note Essay

Chemistry Exam Study Sheet Organic Chemistry • Study of compounds to which carbon is the principal element. • Carbon is special because it has 4 bonds. Functional Groups • Organic substances are organized into organic families. • Organic Families – group of organic compounds with common structural features. o Each family has a recognizable physical property and a specific structural arrangement. o Each combination is referred to as a functional group. o Even…

Words 2359 - Pages 10

Thesis On Ants, Social Insects

Phylogeny takes into account genetics. Haploid cells are a result of the process of meiosis, a type of cell division in which diploid cells divide to give rise to haploid germ cells. A haploid cell will merge with another haploid cell at fertilization. 1/16/13 Species Definition Mayr's Species Definition – Can reproduce and offspring are viable and have the same level of fitness. This definition excludes one group -The biological species definition does not work for asexually reproducing organisms…

Words 3640 - Pages 15

Biochem Notes Exam 2 Essay

Biochemistry (Chem 160a) – Exam 2 Notes Chapter 6: I. Overview A. Levels of protein structure (each higher level structure contains the lower level structure) 1. Primary structure – sequence of AA’s in peptide/protein (peptide bonds) Ala – Gly – Leu – Met – Cys – Phe 2. Secondary structure – Localized regions of ordered structures –helices –sheets –turns (is a part of a kind of sheet structures) 3. Tertiary structure - 3D structure of the entire polypeptide chain -composed of multiple regions…

Words 7508 - Pages 31

Effective ta rate Essay examples

variability of effective tax rates, because some authors try to justify the reasons for the existence of differences between these taxes and statutory ones. However, this kind of research has never been done for the Portuguese case. The objective of this study is to examine the relationship between the effective tax rate and some specific characteristics of Portuguese companies. On the other hand, in the analyzed period we can verify the change of accounting standards which happened in Portugal in 2010,…

Words 9073 - Pages 37

Essay about SSRN Id2180032

variability of effective tax rates, because some authors try to justify the reasons for the existence of differences between these taxes and statutory ones. However, this kind of research has never been done for the Portuguese case. The objective of this study is to examine the relationship between the effective tax rate and some specific characteristics of Portuguese companies. On the other hand, in the analyzed period we can verify the change of accounting standards which happened in Portugal in 2010,…

Words 9069 - Pages 37

Guilds to 2013 Aicpa Essay example

CONTENT AND SKILL SPECIFICATIONS FOR THE UNIFORM CPA EXAMINATION Approved by the Board of Examiners American Institute of Certified Public Accountants May 15, 2009 Update Approved on October 1, 2011 Effective Date: January 1, 2013 Examinations Team American Institute of Certified Public Accountants 100 Princeton South Suite 200 Ewing, NJ 08628 ii COPYRIGHT © 2011 BY AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS, INC. CONTENT SPECIFICATION OUTLINES (CSOs) The outline portions…

Words 7307 - Pages 30