By Andrew M. Chisholm
Nice intro to derivatives. effortless to stick to factors and situations suggest this can be a needs to learn for an individual new to derivatives. used to be in a position to learn this at the move in exactly a number of weeks, it is only 250 pages. certainly precious details for hedging opposed to volatility.I simply want I had picked it up previous.
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Extra info for Derivatives Demystified: A Step-by-Step Guide to Forwards, Futures, Swaps and Options
Sample text
1% for two months. To simplify matters we will assume here that there are no ‘spreads’ in the market, that the interest rates for borrowing and lending funds are exactly the same, and that the spot exchange rates for buying and for selling pounds are exactly the same. In practice money dealers charge a spread between their borrowing and lending rates, and currency traders quote a spread between their buy (bid) and sell (offer or ask) rates. 5 US dollars on the spot FX market. Pounds can be invested for two months at an interest rate of 1% for the period.
In simple terms, a seller of one futures contract (a ‘short’) is making a commitment to deliver $100 000 par value of the US Treasury notes stipulated in the contract at a fixed price. A buyer (a ‘long’) is committing to take delivery at a fixed price. 625 per contract Points and one-half of 1/32 of a point March, June, September and December Seventh business day before the last business day of the delivery month Last business day of the delivery month Source: CBOT Reprinted by permission of the Board of Trade of the City of Chicago, Inc.
If this is random information, some of it will be ‘good news’ for the price of the underlying asset and some ‘bad news’. There is thus a chance that at the point of delivery the underlying will actually be above the value that was expected when the forward contract was initially agreed, but there is also a chance that it will be below that value. If the new information is indeed random we could say that there is a 50:50 chance that the spot price will be above (or below) that initially expected value.