Derivative — definition?
A contract whose value depends on an underlying asset.
Forward contract — role?
Obligation to buy or sell at a future date.
Futures contract — function?
Exchange-traded standardized forward settled daily.
Options contract — role?
Gives holder right but not obligation to buy/sell.
Call option — right?
Right to buy at strike K.
Put option — right?
Right to sell at strike K.
Long forward payoff — formula?
S_T − F_0.
Short forward payoff — formula?
F_0 − S_T.
Forward arbitrage — mechanism?
Buy spot, sell forward if overpriced.
Futures clearinghouse — benefit?
Eliminates credit risk via daily settlement.
Margin call — trigger?
When margin falls below maintenance margin.
Mark-to-market — process?
Daily revaluation of futures positions.
Basis risk — definition?
Hedging error from basis change.
Basis — formula?
S − F.
Cross hedging — purpose?
Hedge with different but related asset.
Hedge ratio h* — calculation?
ρ × (σ_S/σ_F).
Equity hedge — goal?
Reduce systematic market risk.
Target beta β* — meaning?
Hedged portfolio beta after adjustment.
Intrinsic value — formula?
max(S−K,0) for calls, max(K−S,0) for puts.
Time value — formula?
Option premium minus intrinsic value.
Protective put — purpose?
Insure against downside risk.
Breakeven — call?
K + premium.
Teste tes connaissances avec un QCM de 22 questions sur Introduction to Derivatives and Hedging.
1. What best describes a derivative contract?
2. Which feature distinguishes a futures contract from a forward contract?
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