Derivative
Financial Derivatives
DERIVATIVE SECURITY:
A derivative security is a security whose value is contingent on the value of other more basic underlying variables. Hence derivatives are also known as contingent claims. Very often the variables underlying derivatives securities are the prices of traded securities. For example, stock option. Futures and Options ⇒⇒⇒⇒⇒⇒ actively traded on the many different exchanges.
Forward Contracts, Swaps ⇒⇒⇒⇒⇒ traded outside of exchanges by financial Institutions and and other derivatives
⇒⇒⇒⇒⇒ their corporate clients ⇔ over-the-counter markets.
FORWARD CONTRACTS:
A forward contract is an agreement between to buy or sell an asset at a certain future time for a certain price. The contract is usually between two financial institutions or between a financial institution and one of its corporate clients. The contract specifies:
What is being exchanged (e.g. cash for a good, cash for cash etc.);
The price at which exchange takes place (delivery price);
The date (ranges of dates) in the future at which the exchange takes place.
In other words, a forward contract locks in the price today of an exchange that will take place at some future date. A forward contract is therefore a contract for forward delivery rather than a contract for immediate or spot delivery, and generally no money is exchanged between the counterparties until delivery.
One of the parties to a forward contract ⇒⇒ to buy the underlying asset on a certain specified assumes long position
⇒⇒ future date for a certain specified price.
The other party assumes short position ⇒⇒ to sell the asset on the same date for the same price.
The delivery price ⇒⇒ the specified price in a forward contract, at which asset is exchanged.
It costs nothing to take either a long or a short position, because the value of forward contract to both parties is zero at the time of making the contract.
1
Settlement of a Forward contract:
It is settled at maturity
DERIVATIVE SECURITY:
A derivative security is a security whose value is contingent on the value of other more basic underlying variables. Hence derivatives are also known as contingent claims. Very often the variables underlying derivatives securities are the prices of traded securities. For example, stock option. Futures and Options ⇒⇒⇒⇒⇒⇒ actively traded on the many different exchanges.
Forward Contracts, Swaps ⇒⇒⇒⇒⇒ traded outside of exchanges by financial Institutions and and other derivatives
⇒⇒⇒⇒⇒ their corporate clients ⇔ over-the-counter markets.
FORWARD CONTRACTS:
A forward contract is an agreement between to buy or sell an asset at a certain future time for a certain price. The contract is usually between two financial institutions or between a financial institution and one of its corporate clients. The contract specifies:
What is being exchanged (e.g. cash for a good, cash for cash etc.);
The price at which exchange takes place (delivery price);
The date (ranges of dates) in the future at which the exchange takes place.
In other words, a forward contract locks in the price today of an exchange that will take place at some future date. A forward contract is therefore a contract for forward delivery rather than a contract for immediate or spot delivery, and generally no money is exchanged between the counterparties until delivery.
One of the parties to a forward contract ⇒⇒ to buy the underlying asset on a certain specified assumes long position
⇒⇒ future date for a certain specified price.
The other party assumes short position ⇒⇒ to sell the asset on the same date for the same price.
The delivery price ⇒⇒ the specified price in a forward contract, at which asset is exchanged.
It costs nothing to take either a long or a short position, because the value of forward contract to both parties is zero at the time of making the contract.
1
Settlement of a Forward contract:
It is settled at maturity