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Derivatives Market

This document provides an overview of financial derivative markets, including derivatives securities, forwards and futures, options, swaps, and caps/floors/collars. It defines each type of derivative contract and describes the key aspects, such as how they are used, their valuation, and the relevant markets. The summary focuses on derivatives as agreements between two parties to exchange assets or cash flows at predetermined prices and dates in order to hedge against various financial risks.

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48 views15 pages

Derivatives Market

This document provides an overview of financial derivative markets, including derivatives securities, forwards and futures, options, swaps, and caps/floors/collars. It defines each type of derivative contract and describes the key aspects, such as how they are used, their valuation, and the relevant markets. The summary focuses on derivatives as agreements between two parties to exchange assets or cash flows at predetermined prices and dates in order to hedge against various financial risks.

Uploaded by

grace
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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AE18 - Financial Markets

Derivatives
Market
Table of
Contents

1. Derivative Securities 2. Forwards and Futures

3. Options 4. Swaps

5. Caps, Floors, and Collars


Derivative
01
Securities
Derivative
01. Securities
An agreement between two parties
to exchange a standard quantity of an
asset at a predetermined price at a
specified date in the future.

Derivative Securities Markets


The markets in which derivative
securities trade.
Forwards
02
and Futures
Spot Markets
Spot Contract is an agreement to transact

02. Forwards involving the immediate exchange of assets and

and Futures
funds.

Forward Markets
Forward Contract is an agreement to transact
involving the future exchange of a set amount
of assets at a set price.

Futures Markets
Futures Contract is an agreement to transact
involving the future exchange of a set
amount of assets for a price that is settled
daily.
03 Options
03. Options
A contract that gives the holder the right, but not the obligation, to buy or sell the
underlying asset at a specified price within a specified period of time.

Call Option Put Option


An option that gives a purchaser the An option that gives a purchaser the
right, but not the obligation, to buy the right, but not the obligation, to sell the
underlying security from the writer of underlying security to the writer of the
the option at a prespecified exercise option at a prespecified price on or
price on or before a prespecified date. before a prespecified date.
Option Values Option Markets
Black-Scholes Model: The Chicago Board of Options
1. The spot price of the underlying Exchange (CBOE) opened in 1973.
asset It was the first exchange devoted
2. The exercise price on the option
solely to the trading of stock
3. The option’s exercise date
4. Price volatility of the underlying options.
asset
5. The risk-free rate of interest
04 Swaps
Currency Swaps

Swaps
04. An agreement between two
A swap used to hedge against
exchange rate risk from mismatched
currencies on assets and liabilities.
parties to exchange assets or
a series of cash flows for a
specific period of time at a Credit Swaps
specified interval
Total Return Swap involves swapping an
obligation to pay interest at a specified fixed
or floating rate for payments representing the
Interest Rate Swap total return on a loan of a specified amount.
An exchange of fixed interest payments for Pure Credit Swap is the alternative swap,
floating-interest payments by two without the interest rate.
counterparties.
Caps, Floors,
05
and Collars
05 Caps, Floors,
and Collars Floor
A put option on interest rates,
often with multiple exercise
dates.
Cap
A call option on interest rates,
often with multiple exercise Collar
dates. A position taken simultaneously
in a cap and a floor.
Thank You!
Chapter 10 - Derivative Securities Markets
Financial Markets and Institutions Fifth Edition
Anthony Saunders & Marcia Millon Cornett

Karol Elaine R. Bercero AE 18 - Financial Markets October 26, 2021

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