Options, Futures and Other Derivatives: Global Edition

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Derivatives can greatly increase leverage. When the price of the underlying asset moves significantly and in a favorable direction, options magnify this movement. Trading Derivatives Speculative trading (regarding futures contracts) refers to the trading of futures contracts without the intention of obtaining the underlying commodity. Thus, speculators basically make bets on the market, unlike hedgers, whose priority is to eliminate exposures.

In options, such as a European call option, the potential loss is capped at the premium paid, while gains can be unlimited if the underlying asset’s price moves favorably. Derivatives are majorly used to hedge or to speculate. The following are specific examples of the uses of derivatives. This course covers the concepts and models underlying the modern analysis and pricing of financial derivatives. The philosophy of the course is to first provide firm foundations for understanding derivatives in general. If the underlying makes a move, the value of the derivative moves with a nearly identical margin. In fact, there is a 1:1 relationship between the derivative and the underlying – explaining why linear derivatives are said to be “delta-one” products. However, the delta itself need not always be equal to 1. Examples of linear derivatives include futures and forwards.

Hedgers

Note that future contract offers similar payoffs as forward contracts. However, futures contracts trade on exchanges; that is, the underlying asset and possible maturity date are clearly stated in the contract. Get full access to Options, Futures, and Other Derivatives, 10th Edition and 60K+ other titles, with a free 10-day trial of O'Reilly. Speculators trade in futures, intending to resell these contracts before maturity. They expect the futures price to move in their favor and make a profit when selling the contracts. However, there can be no guarantees that the price will move in their favor, and therefore this trading strategy is also laden with risks. If the price moves against a speculator’s position, they could suffer substantial losses. The required technical tools will be explained carefully, allowing students to learn the language and to be able to converse with derivatives professionals. Once the tools are in place, those same tools can then be applied to any derivative. Special emphasis will be put on those derivatives that shape the modern world.

o The Applications Builder consists of a number of Excel functions from which users can build their own applications. It includes a number of sample applications and enables students to explore the properties of options and numerical procedures more easily. It also allows more interesting assignments to be designed. Margins: Daily settlements may not provide a buffer strong enough to avoid future losses. For this reason, each party is required to post collateral that can be seized in the event of default. The initial margin must be posted when initiating the contract. If the equity in the account falls below the maintenance margin, the relevant party must provide additional funds to cover the initial margin. There’s always the risk that a trader with instructions to use derivatives as a hedging tool will be tempted to take speculative positions, possibly in the hope of making a “kill’. Such a move can be disastrous for the firm.

Customize your course - Create a learning path with existing content, while developing original activities and uploading your own multimedia resources. Investors trade in contracts that have been identified in the exchange. Traditionally trading was done using the outcry system (Investors met at the exchange floor and used signals to indicate their proposed trades.) Currently, trading is done electronically through a computer. Advantages of OTC Markets over Exchanges Closing out a deal prior to maturity, e.g., in an American option that can be exercised before maturity, can at times be difficult. Even more likely, bid-ask spreads could be so large as to represent a substantial cost. Operational Risk