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Derivatives
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Derivatives- I

Mapping to Curriculum
• Reading 60: Derivative Markets and Instruments • Reading 61: Forward Markets and Contracts

• Reading 62: Future Markets and Contracts

Expect around 6 questions in the exam from today’s lecture

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Key Concepts
• Difference Between OTC And Exchange Traded Contracts • Payoffs of Futures and Forwards • FRA‘s • Margins • Types of Futures

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Introduction
What are the fundamental assets trading in the market?

1. 2. 3. 4.

Stocks Bonds Commodities Currency

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What Is A Derivative?

D

D – Derivative

A

A – Underlying, a fundamental asset For example, a Stock, Bond, Currency, Commodity

The value of D changes as A moves

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Derivatives Payoff

Non-Linear Payout Linear Payout Y-axis → Profit/Loss on (D)

X-axis → Value of Underlying (A)

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Types Of Derivatives

Derivatives

Linear (Have Linear Payoffs)

Non-Linear (Have Non-Linear Payoffs)

Forwards/Future s (D)

Options (D)

Swaps, Exotics (D2)

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Definition
• Derivative: It is a financial instrument whose value is derived (hence the name derivative) from the value on an underlying asset – Underlying asset: It can be stocks, indices, bonds, commodities, currency, rates, etc.

• Main types of derivatives (explained later): – Forwards and Futures – Swaps – Options – Exotics

Exchange traded: • Traditionally open-outcry system • Switching to electronic trading • Contracts are standardized • Example: - Europe: Liffe: http://www.liffe.com - US: Chicago Board of Trade http://www.cbot.com

• Trading
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