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DERIVATIVES

DERIVATIVES. What are derivatives?. Financial instruments whose price depends on the movement of another price. The value of the contract is derived from another asset. ↓ the underlying asset:commodities, currencies, securities Futures & forwards, options, swaps. Wheat Coffee

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DERIVATIVES

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  1. DERIVATIVES

  2. What are derivatives? • Financial instruments whose price depends on the movement of another price. • The value of the contract is derived from another asset. ↓ the underlying asset:commodities, currencies, securities • Futures & forwards, options, swaps

  3. Wheat Coffee Palm oil Nickel Sugar Maize Milk Bauxite Iron ore Wool Grain Rubber Wine Copper Beef Tea Zinc Gold Lead Oil Phosphates Tin Timber Silver COMMODITIES

  4. Commodities can be traded... • ...for immediatedelivery at their current prices on spot markets • ... for future deliveries at pricesfixed at the time of the deal on futuresmarkets

  5. Futures • Study the example of a silversmith and fill in the missing words (next slide) http://www.investopedia.com/university/futures/futures3.asp

  6. Futures: The Case of a Silversmithhttp://www.investopedia.com/university/futures/futures3.asp A silversmith must secure a certain amount of silver in six months time for earrings and bracelets that have already been advertised in an upcoming catalog with specific prices. But what if the price of silver ………….over the next six months? Because the prices of the earrings and bracelets are already ………., the extra cost of the silver can't be passed on to the ……….. buyer, meaning it would be passed on to the silversmith. The silversmith needs to ………….., or minimize his ………….. against a possible price ………….. in silver. How?

  7. Futures: The Case of a Silversmithhttp://www.investopedia.com/university/futures/futures3.asp The silversmith would enter the ……………….. market and purchase a silver contract for settlement in six months time (let's say June) ……………a price of $5 per ounce. At the end of the six months, the price of silver in the cash market is actually $6 per ounce, so the silversmith benefits from the futures …………… and escapes the higher price. Had the price of silver …………….in the cash market, the silversmith would, in the end, have been better off without the futures contract. At the same time, however, because the silver market is very ………………., the silver maker was still sheltering himself from risk by entering into the …………………contract.

  8. Options Study the two theoretical situations illustrating the buying of an option in an everyday situation: http://www.investopedia.com/university/options/option.asp Answer the questions: What value is the derived value in the previous example? What options did the buyer of the option have? What was the underlying asset involved? What can affect the price of an option in this case? Who takes most risk? Is this option a call option or a put option?

  9. Can you find synonyms and opposites in MK:p.92? floating rate put option hedging agreed-upon price option to sell pre-determined price swap call option speculation exchange option to buy fixed rate pre-arranged price strike price

  10. Spread – betting (MK: p.93) • Explain the reason for calling such transactions “spread-betting”? • Two reasons for spread-betting? • Risky only?

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