FNCE90011 Derivative Securities

Feb 3rd, 2012
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A derivative is an asset/security whose value is completely determined by the values of one or more other ("underlying" or "state") variables. In many cases the underlying variable is the price of a traded asset such as … stocks / shares.

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FNCE90011 Derivative SecuritiesTopic 1FundamentalsTopic OutlineBasic ConceptsOption Payoff and Profit DiagramsMiscellaneousComplicated PayoffsAppendix: Market StructureReferencesHull (8th edition) Chapters 1, 4.2, 5.2, 9, 11Hull (7th edition) Chapters 1, 4.2, 5.2, 9, 11Hull (6th edition) Chapters 1, 4.2, 5.2, 8, 10Copyright John C. Handley 2012.1. BASIC CONCEPTSWhat is a derivative ?A derivative is an asset/security whose value is completely determined by the values of one or moreother ("underlying" or "state") variables. In many cases the underlying variable is the price of a tradedasset such as stocks / sharesstock indexbonds / interest ratescurrenciescommoditiesother derivativesAnd sometimes the underlying variable appears to be a bit crazy such as in the case of weatherderivatives2The derivatives market is the market where derivative securities are traded The four big classes ofderivatives are:(i) forwards and futures(ii) options (iii) swaps (iv) credit derivativesUsers Of Derivativeshedgeralready has an exposure to future movements in the price of the underlying asset and is interested inreducing riskeg: you own a share and you think the stock price will fall but you do not want to sell the share whatcan you do ?3speculatorwishes to take a position in the market i.e. to take on risk with a view to making a profit. Either he isbetting that the asset price will go up or that it will go downeg: y

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