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Terms in this set (63)
- derivatives are financial instruments, the value of which is related to the performance of an underlying asset
- many derivative contracts are similar to insurance policies
- in the absence of a triggering event, such as a fire, there is no payout
- after the triggering event has occurred, the size of payout increases as the trigger point is increasingly surpassed
- many derivative contracts are similar to insurance policies
- in the absence of a triggering event, such as a fire, there is no payout
- after the triggering event has occurred, the size of payout increases as the trigger point is increasingly surpassed
Derivative - financing instrument, the value of which is based on the the value of he underlying asset
Forward Commitments - obligate 2 parties to transact in the underlying asset in the future at a set price
Contingent Claims - are similar, but only the party that sold the contract is obligated to transact in the future, the buyer has the right but not the obligation to transact and pays a premium
Forward Commitments - obligate 2 parties to transact in the underlying asset in the future at a set price
Contingent Claims - are similar, but only the party that sold the contract is obligated to transact in the future, the buyer has the right but not the obligation to transact and pays a premium
- derivatives can be used to enter positions not possibly using the underlying alone
- for example, derivatives can make it easier and lower cost to realize for short exposure to the underlying asset
- the exposures realized via derivatives and the highly leveraged nature of the exposure facilitate risk transfer
- the process by which a company or individual identifies financial risk and adjusts those risks to target levels is referred to as risk management
- for example, derivatives can make it easier and lower cost to realize for short exposure to the underlying asset
- the exposures realized via derivatives and the highly leveraged nature of the exposure facilitate risk transfer
- the process by which a company or individual identifies financial risk and adjusts those risks to target levels is referred to as risk management
- in forward commitment, both the long and short parties are obligated to transact in the future
- in contingent claim derivatives, the party in the long position has the right but not the obligation to transact in the future
- for the party in the short-contingent claim position, if the party in the long position elects to transact, the party in the short position is obligated to reciprocate
- in contingent claim derivatives, the party in the long position has the right but not the obligation to transact in the future
- for the party in the short-contingent claim position, if the party in the long position elects to transact, the party in the short position is obligated to reciprocate
Forward Commitment - binding agreement between two parties to transact in a specified amount of an underlying asset at a specified price, future time, and location
- the payoff to the party in the long position is the difference between the spot price of the underlying at maturity and the forward price
- the counterparty in the short position realizes the opposite payoff, the difference between the forward price, and the spot price at maturity
- the payoff to the party in the long position is the difference between the spot price of the underlying at maturity and the forward price
- the counterparty in the short position realizes the opposite payoff, the difference between the forward price, and the spot price at maturity