Ecco

1094 WordsMay 9, 20125 Pages
Financial Derivatives Revision Sheet Futures: * agreements to buy or sell an asset at a future time or date * traded on exchange * standardised * choose to close out before delivery * Daily settlement * Margins * Range of delivery dates * Virtually no credit risk Forwards: * agreement to buy or sell an asset at a future time or date * private agreement between two traders (clients or financial institutions) * Not standardised * Settled at end of contract * Delivery of final cash settlement usually takes place * Usually one specified delivery date * Some credit risk Closing out: entering into the opposite trading strategy to the original Hedging using futures: the…show more content…
* Suggests auto and cross correlation for cash and future prices Alternative Explanation: Efficient Markets * Stock prices change only when there is new info- cannot be predicted ahead of time * Contract to cascade Santoni’s Counter Argument * He said that selling futures when there is such a wide gap between futures and cash- portfolio schemes would not do this * Index Future arbitrage was halted at 1.30pm, however this did not stop the sharp decline in stock prices. * Prices also collapsed in over sea markets where programme trading was virtually non existence Extra notes on October crash: * Cash and future prices should differ by the basis. * If index future price is under pressure in Chicago, index futures arbitrage will lead to a massive selling in the cash market. Call option * Gives you the right but not the obligation to buy * Long Payoff: max(St-K,0) * Short Payoff: -max(St-K,0) Put option * Gives you the right but not the obligation to sell * Long payoff: max(K-St,0) * Short payoff: -max(K-St,0) American option: An option that can be exercised at any time during its life European option: An option that can only be exercised at the end of its life In-the-money: if you could exercise immediately you would get

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