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contract, the derivatives are settled at a future date.
Role of Financial Derivatives.
We can classify financial derivatives based on different parameters. The most common are:
1. Derivatives according to the type of contract involved:
a. ** Options**.
b. Forwards.
c. Contracts for difference.
d. SWAPS.
2. Depending on where derivatives are traded and traded:
Derivatives traded on organized markets: Here are standardized contracts on underlying assets that were previously authorized. Furthermore...

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CHAPTER 7: CURRENCY FUTURES AND ** OPTION** MARKETS
7.1 FUTURE CONTRACTS
7.1.1 Definition of future contract–> contracts written requiring a standard quantity of an available currency at a fixed exchange rate and at a set delivery date.
A future contract is defined as a contractual agreement to buy or sell an asset at a pre-determined price in the future. The contracts detail the quality and quantity of the underlying asset.
Background of currency futures in 1972: Chicago Mercantile Exchange...

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Compare and contrast foreign currency futures and ** options**. Identify situations where you may choose one or the other.
When Barings Bank, the oldest merchant bank in London, collapsed in 1995 after one of the bank’s employees lost £827 million due to speculative investing, primarily in futures contracts, it illustrated the extreme danger and volatility of derivatives.

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value
b. Exercise price
c. Volatility of asset returns
d. Time to maturity
e. Risk-free rate
HINT: Note that the time to maturity of the ** options** is when uncertainty is resolved not necessarily when the sequel is made. The asset value is what you will get if you exercised the

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following are always positively related to the price of a European call ** option** on a stock?
c. The volatility
5. When we talked about Vega hedging, if a portfolio has 1000 shares of SPY and 10 contracts of at-the-money December 2013 put

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Trading volatility is nothing new for ** option** traders. Most

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European call ** option** with strike price of K and maturity T and
buys a put with the same strike price and maturity. Describe the investor's position.
The payoff to the investor is
- max (ST - K , 0) + max(K - ST, 0)
This is K- ST in all circumstances. The investor's position is the same as a short position in a forward contract with delivery price K.
8 .4.)Explain why brokers require margins when clients write

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Do you Know?
• What is Derivative Market?
• What is Hedging?
• What is OTC?
• What is Exotic ** Option**?
Parisian

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Many years ago stock ** options** were rarely used as incidental benefits for top executives. Nowadays, compensating employee whit stock

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STOCK ** OPTIONS** - AN EFFECTIVE COMPENSATION METHOD
Stock

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