|
 

÷
 

 ÷


|
 
j A Financial Instrument That Derives Its Value
From An Underlying Security.
j An easy way to think of derivatives is as a ³side
bet´ on interest rates, exchange rates,
commodity prices, and practically ANYTHING
that you can think of.




 
j Not to raise capital
j Buy or sell to protect against adverse
changes in external factors
g


 
 
 

j Bonds
j Cash
j Stocks
The standard market is what most people think
of when they think of the market. The truth
is that derivatives are the fastest growing
sector of the market. In fact, they are the
largest section of the market. The „

  are not taken into consideration. There
are more mutual funds in the market than
there are stocks.
›
  |
 
j Forwards
j Futures
j Options
j Swaps
 V


g

 
j The agreement to pay for and pick up,
³Something´ at a pre-determined date and
or time, for a pre-determined price. Usually
traded off of the trading floor between two
firms.


j An agreement on Monday to buy a book,
from a bookstore on Friday for $1000.00.
j On Friday, you return to the bookstore and
take delivery of the book and pay the
$1000.00.
j ›

 



<
 V

Similar to forwards in length of time. However,
profits and losses are recognized at the close of
business daily, ³Mark-to-market.´
Transactions go through a clearinghouse to
reduce default risk. 90% of all futures contracts
are delivered to someone other than the original
buyer.
 

j On Monday we enter into a futures contract to buy
our book on Friday. We are required to place a
deposit for the book of 50% ($500.00). We are told
that if the book appreciates in value we may be
required to increase the deposit. If the book
depreciates in value, we may take back some of the
money. Wednesday the book goes to $1500.00. We
must deposit another $250.00. On Thursday the
book drops to $750.00. We can collect $375.00. On
Friday the book value is $800.00, therefore we owe
$425.00 on the remaining balance.
•

j Options come in many flavors. To name a
few: collar, cylinder, fence, mini-max, zero-
cost tunnel and straddle. These are all newer
forms of options. The most common
options discussed are ô
and .
j An • ›•
is the right, not the obligation
to buy or sell an underlying instrument.
g
j `
 erson buys the right (a contract) to
buy an asset at a certain price. They feel that the
price in the future will exceed the strike price.
This is a ˜ 
 position.

j %  
 erson sells the right (a contract) to
someone that allows them to buy a asset at a
certain price. The writer feels that the asset will
devalue over the time period of the contract. This
person is ˜ 
 on that asset.

j `
  Buy the right to sell an asset at a pre-
determined price. You feel that the asset will
devalue over the time of the contract. Therefore
you can sell the asset at a higher price than is the
current market value. This is a bearish position.

j %    Sell the right to someone else. This

will allow them to sell the asset at a specific price.
They feel the price will go down and you do not.
This is a ˜ 
 position.