Derivatives
A derivative and its underlying, four families (forwards, futures, options, swaps), three uses (hedging, speculation, arbitrage), premium, strike, payoff profile and leverage.
- 23 cards
- 5 topics
- Free
The outline, topic by topic
Each topic is weighted the way the exam weighs it.
- Concepts
- Questions
- Sort and link
- The numbers
- The curves
A few cards from the deck
Derivative: what is it?
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A financial contract whose value depends on the price of another asset, the underlying: a share, currency, commodity or interest rate.
It is worth nothing in itself: its value “derives” from the underlying. It can be used to reduce a risk as well as to take one.
What is the most the buyer of a call option can lose?
- The premium they paid
- The strike price multiplied by the number of assets
- An unlimited sum if the price rises
- The difference between the final price and the strike
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The premium they paid
The buyer holds a right, never an obligation: if the price is unfavourable, they let the option expire and lose only the premium. It is the seller who can lose a lot.
The price at which the option allows buying or selling the underlying is the … price; the sum paid to acquire this right is the ….
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The price at which the option allows buying or selling the underlying is the strike price; the sum paid to acquire this right is the premium.
The premium is lost whatever happens, even if the buyer does not exercise. The strike does not depend on the day's price.