Derivative Securities Markets

Financial security whose payoff is linked to another, previously issued security.

-An agreement between two parties
- to exchange a standard quantity of an asset or cash flow
-at a predetermined price
-and at a specified date in the future

Changes in the value of the underlying security to be exchanged

Derivative Securities

Agreement made between a buyer and a seller at time 0 for the seller to deliver the asset immediately and the buyer to pay for the asset immediately

Because the buyer of the asset believes its value will increase in the immediate future (over the investors holding period)

1. the immediate and simultaneous exchange of cash for securities

1. a contractual agreement between a buyer and a seller at time 0 to exchange a pre-specified asset for cash at some later date

Because the future (spot) price or interest rate on an asset is uncertain.

Agreement between buyer and seller at time 0 to exchange a STANDARDIZED asset for cash at some future date.

Each contract has a standardized expiration and transactions occur in a centralized market.

Because the terms of each contract are negotiated individually between the buyer and seller.

1. forward contracts are bilateral contracts subject to conterparty default risk, but for futures this risk is significantly reduced by the FUTURES EXCHANGE guaranteeing to idemnify (protect against risk) counterparties against credit or default risk.

In outstanding futures contracts, the prices are adjusted each day to reflect current futures market conditions.

Unless a systematic financial market collapse threatens an exchange itself...the exchange absorbs and assumes the contracts so no counterparts loses money

Method of futures tranding where traders face eachother and "cry out: their offer to buy or sell a stated number of futures contracts at a stated price.

Because the terms of each contract are negotiated individually between the buyer and seller.

1. forward contracts are bilateral contracts subject to conterparty default risk, but for futures this risk is significantly reduced by the FUTURES EXCHANGE guaranteeing to idemnify (protect against risk) counterparties against credit or default risk.

In outstanding futures contracts, the prices are adjusted each day to reflect current futures market conditions.

Unless a systematic financial market collapse threatens an exchange itself...the exchange absorbs and assumes the contracts so no counterparts loses money

Method of futures tranding where traders face eachother and "cry out: their offer to buy or sell a stated number of futures contracts at a stated price.

exchange members who trade for their own account

exchange members who take a position in the futures market based on their expectations about the future direction the prices of underlying assets

exchange members who take a position within a day and liquidate it before days end.

exchange members who take positions for very short periods of time, sometimes only minutes, in an attempt to profit from this active trading

Instructing the floor broker to transact at the best price available

Instructing the floor broker to transact at a specified price

The purchase of a futures contract

buying futures is taking the long position

A sale of a futures contract

futures holder takes a short position when trying to sell futures.

the unit that oversees trading on the exchange and guarantees all trades made by the exchange traders

interest rate futures

currency futures

equity stock index futures

A BOND or a short-term fixed-interest security's price or interest rate

EX: treasury securities, eurodollar cds

an exchange rate

ex: yen to USD

it is a major us or foreign stock market index

ex : DJIA

the total number of futures, put options, or call options contracts outstanding at the begining of the day

1. liquidate the position before the futures contract expires

2. hold the futures contract to expiration

call your broker and requests an offsetting trade to your original position, and opposite position

1. buy f.c with the hope of later being able to sell them at a higher price.

2. sell f.c with hope to being able to bu back identical and offsetting futures contracts at a lower price

1. hedgers buy a f.c to lock into a price now to protect against future rising prices.

2. hedgers sell a futures contract to lock in a price now to protect against future falls in prices.

A deposit required on futures trades to ensure that the terms of any futures contract will be met.

the margin a futures trader must maintain once a futures position is taken.
If losses on the customers futures position occur and the level of the funds in the margin account drop below this margin, the customer is required to deposit addition funds into his acct, bringing it back to initial margin.

a margin call is received when the margin account level drops below a stated level (maintenance margin) and this call requires the customer to deposit additional funds into his account...bringing it back up to initial margin.

an investment in which traders post and miain only a small portion of the value of their futures position in their accounts.

The vast majority of the investment is borrowed from the investors broker.

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.

An option that gives a purchaser the right, but not the obligation, to buy the underlying security from the writer of the option at a pre-specified exercise price on a pre-specified dated.

An upfront fee paid to the writer (or seller) of a call option that is an immediate negative cash flow for the buyer. It is the only loss the buyer can make.

an option that gives a purchaser the right, but not the obligation, to sell the underlying security to the writer of the option at a pre-specified price at a pre-specified date