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Marketing paradigms class lectures_252060110-Lijfsoins

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FIN 413 – RISK MANAGEMENT Introduction Topics to be covered • • • • • Derivatives Types of traders The risk management process Leverage Financial engineering Suggested questions from Hull 6th edition: #1.4, 1.7, 1.11, 1.18 5th edition: #1.4, 1.7, 1.11, 1.18 Derivatives • A derivative is a financial instrument whose value derives from the value of something else. • Question: Is a barrel of oil a derivative? • Consider an agreement/contract between A and B: If the price of a oil in one year is greater than $50 per barrel, A will pay B $10. If the price of a oil in one year is less than $50, B will pay A $10. • Question: Is this agreement a derivative? Derivatives Why might A and B make such an agreement? 1. To hedge or reduce risk. Suppose A is an oil producer and B is a refinery. A will earn $10 if the price of oil goes down. B will earn $10 if the price of oil goes up. 2. To speculate on the price of oil. Derivatives • A derivative is a financial instrument whose value derives from the value of something else, generally called the underlying(s). • Underlying: a barrel of oil, a financial asset, an interest rate, the temperature at a specified location. Derivatives Derivative Derivative security Derivative asset Derivative instrument Derivative product Underlying(s) Derivatives Example Underlying Stock option, such as option on the stock of Nortel Networks A stock, such as the stock of Nortel Networks Stock index option, such as an ...
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