intro to finance 7

18 flashcards · Other · by Daniel F.

1. hedging

   reducing a firms exposure to price or rate of fluctuations

2. derivative security

   a financial assets that represents a claim to another financial asset

3. hedging with forward contracts

   The seller & the buyer can simply agree that, at set dates in the future, the seller (buyer) must deliver (receive) a certain quantity of wheat, & the buyer (seller) will pay (receive) a set price. Settlement Date: One party must deliver the goods to the other on a certain date in the future. Forward Price: The other party pays the previously agreed forward price & takes the goods. the buyer has the obligation to take the delivery and pay the seller has the obligation to make the delivery and a…

4. payoff profile of hedging with forward contracts

   price is fixed, as buyer, if price rises you win if price decreases you lose, opposite of normal

5. foreign currency forward hedging for importer

6. foreign currency forward hedging for exporter

7. futures contract

   A future contract is simply a forward contract with the feature that gains and losses are realized each day rather than only on the settlement date types commodity (oil wheat) financial very standardized, you cannot change it Contract size Method of stating exchange rates Maturity date Last trading day Collateral (20%) and maintenance (80%) margins Settlement Commissions Use of a clearinghouse as a counter party

8. future market hedge (futures trading)

   daily Profit/Loss = Price of Future (time t+1) - Price of Future (time t) However, the settlement rarely occurs in the futures Profit/ Loss = Price of Future ( when leave the market) - Price of Future ( when enter the market) I am not interested in the underlying product just the price first transaction can buy or also sell

9. futures vs forwards

   Forward Contract Private agreement Customizable terms Settles once at end of contract Default risk Futures Contract Publicly traded Standardized terms Settles daily No default risk

10. future market hedge example

    if I buy today and agree on future price and it goes up I make money (payoff profile is same as forwards)

11. Long position vs short position

    buy future vs sell future price

12. swap contracts

    An agreement by 2 parties to exchange, or swap, specified cash flows at specified intervals in the future. types interest rate swaps currency swaps commodity swaps

13. hedging swap contract example

14. floating-rate loan

    loan for which the payments are adjusted periodically to reflect changes in interest rates generally lower interest rates than fixed rate loans

15. option contracts

    An agreement that gives the owner (buyer) the RIGHT, but NOT THE OBLIGATION, to buy or sell a specific asset at a specific price for a set period of time. 3 different price elements exercise or strike price - the price at which the assets can be purchased (call) or sold (put) premium - the cost, price, or value of the option itself actual spot price of the asset in the market option is only limiting loss

16. hedging with option contracts example

    2 contracts since only buyer has the right ti decide (graphs represent decision at maturity) buyer of the call call option on asset x with strike price of 58.5 and premium of 0.5 per x purchase the right to buy out of the money: option not exercisable in the money: option is exercisable i should exercise my right if spot price is higher than the strike price premium is sunk cost porfit: spot rate - (strike price + premium) seller of the call buyer of the put Put Option on asset X with strike pr…

17. how much is the put option premium

    components intrinsic value time value total value

18. value of call option