Deivatives

1. DERIVATIVES S.CLEMENT

2. Derivatives traders at the Chicago Board of Trade

3. Financial Risks Market risk is exposure to the uncertain market value of a portfolio. A trader holds a portfolio of commodity forwards . She knows what its market value is today, but she is uncertain as to its market value a week from today. She faces market risk.

10. Four most common examples of derivative instruments are:

15. Some common examples of these derivatives are: UNDERLYING CONTRACT TYPE Exchange-traded futures Exchange-traded options OTC swap OTC forward OTC option Equity Index DJIA Index future NASDAQ Index future Option on DJIA Index future Option on NASDAQ Index future Equity swap Back-to-back n/a Money market Eurodollar future Euribor future Option on Eurodollar future Option on Euribor future Interest rate swap Forward rate agreement Interest rate cap and floor Swaption Basis swap Bonds Bond future Option on Bond future n/a Repurchase agreement Bond option Single Stocks Single-stock future Single-share option Equity swap Repurchase agreement Stock option Warrant Turbo warrant Credit n/a n/a Credit default swap n/a Credit default option

32. Why buy options?

39. OPTION PAY OFF A sells a European call option on a share of XYZ COMAPNYat a premium of Rs. 3 per share on March 01, 2009. The strike price is Rs.65 and the contract matures on June 30, 2009.. It is clear from the graph that the upside potential is limited to a maximum of Rs.3 per share, which has been received as option premium. However, the downside risk is unlimited and the investor may experience huge losses, if the market does not move according to his expectations. S Xt C Payoff Net Profit 62 65 3 0 3 63 65 3 0 3 64 65 3 0 3 65 65 3 0 3 66 65 3 -1 2 67 65 3 -2 1 68 65 3 -3 0 69 65 3 -4 -1 70 65 3 -5 -2 71 65 3 -6 -3