Derivatives
financial derivative securities
derive all/part of the value from somewhere else
exercise price
the price a security is purchased or sold
intrinsic value put vs call option
call
at or out of $: 0
in $: exercise price - stock price
put
at or out of $: 0
in $: stock price - exercise price
types of markets
1) spot market
2) forward market
3) future market
why trade indirect claims
1) expand investment opportunity
2) lower cost
3) increase leverage
expiration date
last day option can be exercised
- american : up to date
- european : on date
uncovered option writer (naked)
covered calls
short position vs long position
short : commits to deliver at contract maturity
long : commits to buy at contract maturity
what are options
call: buy at fixed quantity at fixed price
put: sell at fixed quantity at fixed price
option premium
the total amount that investors pay for an option
protective puts
buy put option as supplement
- guarantees minimum price stock sold
Hedgers vs speculators
- buy/sell futures to offset risk
spectators
- buy/sell futures to make profit
- assume risk of price change (hedgers avoid this)
expectations
call buyer : expects price to inc
put buyer : expect price drop
call seller : expect price to drop or stay same
put seller : expect price to inc or stay same
where do exchange happen
Montreal exchange
Chicago board options exchange
time value of option
value = volatility
time value = 0 on expiration date
time = positive value
options characteristics
in the money: call option, put option
out of money: call option, put option
at the money: all options
CDCC
Canadian derivative clearing corporation
- all equity, bond, stock position are issued and guaranteed