selling 5-year and 10-year fixed-price oil supply contracts to a number of customers. Unlike the traditional forward contacts‚ the firm provided customers the option that allowed customers to call for cash settlement on the full volume of outstanding deliveries if market prices for oil rose above the contracted price. More specifically‚ the option clauses entailed that if the front-month New York Mercantile Exchange (NYMEX) futures price exceeded the forward price‚ the counterparties could receive one-half
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presentation. Derivative Introduction A derivative is a financial contract which derives its value from the performance of another entity such as an asset‚ index‚ or interest rate‚ called the "underlying". Derivatives are one of the three main categories of financial instruments‚ the other two being equities (i.e. stocks) and debt (i.e. bonds and mortgages). Derivatives include a variety of financial contracts‚ including futures‚ forwards‚ swaps‚ options‚ and variations of these such as caps‚ floors
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Questions Problem 1.8. Suppose you own 5‚000 shares that are worth $25 each. How can put options be used to provide you with insurance against a decline in the value of your holding over the next four months? You should buy 50 put option contracts (each on 100 shares) with a strike price of $25 and an expiration date in four months. If at the end of four months the stock price proves to be less than $25‚ you can exercise the options and sell the shares for $25 each. Problem 1.9. A stock
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Structure of a multinational corporation Board of Directors Management Shareholders Debt Assets Equity o o o o o The firm can be viewed as the nexus of a set of contracts between various stakeholders in the firm. In this set-of-contracts perspective‚ the corporation is defined by a legal framework of contracts. Important contracts include those with debt and equity‚ customers‚ suppliers‚ employees‚ and host governments. The traditional goal of financial management is to maximize shareholder wealth
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Chapter 10- Derivative Securities Markets LG 10-1. Distinguish between forwards and futures contracts LG 10-2. Understand how a futures transaction is conducted LG 10-3. Identify information that can be found in a futures quote LG 10-4. Recognize what option contracts are. LG 10-5. Examine information found in an option quote. LG 10-6. Know the main regulators of futures and option markets LG 10-7. Describe an interest rate swap LG 10-8. Understand caps‚ floors‚ and collars LG 10-9. Identify
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Outline Example of a forward contract AFF9150 Lecture 2: Forwards and Futures Binh Do Futures Standardized Contract Terms Unilateral Reversal of Positions Required reading: Sundaram and Das – Ch 1 (pp5-9) & Ch 2 Default Risk and Margin Accounts Case Study: Metallgesellschaft AG 1 2 What is a forward contract? Payoff to a forward contract • A private agreement between two parties‚ a buyer and a seller‚ that calls for delivery of an asset at a future date with a price
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have made‚ and if the investment loses money‚ your hedge‚ if successful‚ will reduce that loss. Hedging techniques generally involve the use of complicated financial instruments known as derivatives‚ the two most common of which are options and futures. Definition of ’Derivative’A security whose price is dependent upon or derived from one or
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institutions who extend risk management services. (see UNCTAD‚ 1998 for a comprehensive survey of instruments) These instruments are forward‚ futures and option contracts‚ swaps and commodity linked -bonds. While formal exchanges facilitate trade in standardized contracts like futures and options‚ other instruments like forwards and swaps are tailor made contracts to suit to the requirement of buyers and sellers and are available over-the counter. In general‚ these instruments are classified
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ERM framework‚ the reasons risk manage might increase the corporation’s value‚ the description of risk events‚ and how companies can reduce these risks are discussed. Also‚ the case study contains illustr4ations on how the use of forward contracts and future contracts can reduce exchange
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Futures and Options Futures and options represent two of the most common form of “Derivatives”. Derivatives are financial instruments that derive their value from an ‘underlying’. The underlying can be a stock issued by a company‚ a currency‚ Gold etc.‚ The derivative instrument can be traded independently of the underlying asset. The value of the derivative instrument changes according to the changes in the value of the underlying. Derivatives are of two types – exchange traded and Over the Counter
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