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A Brief Note On Financial Derivatives

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Financial Derivatives Introduction Derivatives are financial instruments whose values are derived from the values of other, more basic, entities, known as the underlying assets. For example, the value of a stock option depends on the price of the relevant stock. Derivatives Markets In the financial markets derivatives are traded on:  Stocks  Stock indices  Exchange rates  Interest rates  Bonds  Credit risk  Commodities (such as electricity, wheat, oil) [4] Derivatives are traded in two different ways – they are traded either on an exchange or over-the-counter (OTC). The advantage of trading derivatives on an exchange is that the contracts are standardized by the exchange and credit risk is eliminated. Open-outcry system was used…show more content…
Answer: Simultaneously buying 100 shares in NY and selling them in London leads to a risk-free profit of: 100 x [($2.03 x100) - $200] = $300 (ignoring transaction costs) Can this arbitrage opportunity last for long? Futures A future is an exchange-traded contract between two parties and the clearinghouse of a futures exchange to buy or sell a commodity whose quantity and quality are determined in the contract at a specified price on a certain date in the future. [1] When there are alternatives about what is delivered, where it is delivered, and when it is delivered, the party with the short position chooses. [4] The clearinghouse responsibility is to ensure for the transaction to be completed. Futures markets are organized so that the risk of default is completely eliminated. This is possible by trading futures contracts on an organized exchange with a clearinghouse which steps in between a buyer and a seller - this means that every trader in the futures markets has obligations only to the clearinghouse. [1] The party that has agreed to buy the underlying asset has what is termed a long position The party that
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