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Options and Futures

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Options and Futures
Options & Futures
I. Introduction to Derivatives

Prof. Domenico Cuoco

Term 5, 2013

What is a Derivative?
Basic Types of Derivatives
The Market for Derivatives

Outline

1

What is a Derivative?

2

Basic Types of Derivatives

3

The Market for Derivatives

Options & Futures, Prof. Domenico Cuoco, 2013

I. Introduction to Derivatives

2

What is a Derivative?
Basic Types of Derivatives
The Market for Derivatives

What is a Derivative?
Derivatives and Contingent Claims

Contingent claims are financial contracts that entitle the counterparties to payoffs that are contingent on the realization of some underlying random variables.
Examples: lottery tickets, insurance policies, catastrophe bonds.

Derivatives are a special class of contingent claims in which the underlying variable that determines the payoffs to the counterparties is the market price of another traded asset (called the underlying asset).
As a result, the value of a derivative is determined by (i.e., derives from) the value of the underlying asset.

Options & Futures, Prof. Domenico Cuoco, 2013

I. Introduction to Derivatives

3

What is a Derivative?
Basic Types of Derivatives
The Market for Derivatives

Forwards
Futures
Swaps
Vanilla Options

Basic Types of Derivatives

The two basic types of derivatives are:
Forwards
Vanilla options (calls and puts)

Variations of these two basic types include more complicated, but closely related, ones, such as futures, forward rate agreements, swaps, caps, floors, exotic options, credit default swaps and more.

Options & Futures, Prof. Domenico Cuoco, 2013

I. Introduction to Derivatives

4

What is a Derivative?
Basic Types of Derivatives
The Market for Derivatives

Forwards
Futures
Swaps
Vanilla Options

Forwards
Definition

A forward contract is an agreement to trade a specified asset (the underlying) on a specified future date (the delivery date or expiration date) for
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