Options, Futures and Other Derivatives: Global Edition

Product Information

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. Suppose that company X enters into a long position to buy 10 million euros in six months. If the actual CAD- EUR exchange rate in six months is CAD 1.1200 per euro, calculate the profit to company X. A futures contract is a standardized, legally binding agreement – traded in on an exchange – between two parties that specifies the price to trade a given asset (commodity or financial instrument) at a specified future date. Some corporate bonds may have derivatives embedded in them. These derivatives will give the bond issuers and holders the right to repay them or redeem them early/ convert them to shares respectively.

Options not only hedge against risk but also provide additional protection against adverse price movements. In other words, they protect against negative risk while preserving upward payoffs. A call option gives the holder the right but not the obligation to buy the underlying asset at the strike price before the expiration date. On the other hand, a put option gives the holder the right but not the obligation to sell the underlying asset at the strike price before the expiration date. Forwards Contracts

A linear derivative is one whose value is directly related to the market price of the underlying variable. What does that mean? Since the 2007-2009 financial crisis, OTC markets are, however, increasingly being regulated. Some of the regulations include: 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. Long exposure in a futures contract means the holder of the position is obliged to buy the underlying instrument at the contract price at expiry. The holder will make a profit if the price of the instrument goes up.

All European options can only be exercised at maturity. On the other hand, American options may be exercised any time between the issue date and expiration. As such, the price of an option is directly proportional to its maturity date. For example, the premium paid for an out-of-the-money option on Apple expiring in one month will be less than the premium paid for an option with the same strike price expiring in one year. For graduate courses in business, economics, financial mathematics, and financial engineering; for advanced undergraduate courses with students who have good quantitative skills; and for practitioners involved in derivatives markets Consider the forward contract on CAD- EUR exchange rate. The spot bid and ask prices per one euro are CAD 1.1080 and CAD 1.1083, respectively. The 6-month bid and ask prices are CAD 1.1120 and CAD 1.1125, respectively.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. The asymmetry in the payoff profile allows for limited loss (the premium paid) with unlimited potential gain. Options have been embedded in capital Investment opportunities to give room for expanding or doing away with the project depending on the turn of events. Speculators are motivated by the leverage that comes with futures contracts in which no initial investment is required. All that’s needed is the initial margin required by the clearinghouse/exchange. The margin is no more than a percentage of the notional value of the underlying. The gains or losses associated with futures can be quite large, and payoffs are symmetrical. There are many types of derivative contracts including options, swaps, and futures or forward contracts.