Introduction: Derivatives
• Options - a contract that gives buyer the
right (not obligation) to purchase or sell
something at a later time.
• Forward/Futures contract is a agreement
between two parties to purchase or sell
something at a later date at a price agreed
on today.
• Swaps - an agreement to exchange cash
flows.
Futures Types
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Agriculture futures
Metallurgical futures
Interest Bearing futures
Foreign Currency futures
Stock Index futures
Functions of Derivatives
• Price Discovery - there is information of futures
price reveals future spot price or for options implied volatility
• Risk-transfer: hedging. Derivatives can reduce
the total portfolio risk when used appropriately.
• Reduction in transaction cost and complete
the market
• Bypassing market impediments (such as
short-selling)