BUS 321 Lecture Notes - Lecture 4: Underlying, Market Liquidity, Financial Instrument

• School: Simon Fraser University
• Department: Business Administration
• Course: BUS 321
• Professor: Jaqueline Faubert

Document Summary

Derivative: more complex, derive value from underlying primary instrument (commodity) rights + obligations affect transferring > 1 risks inherent in underlying primary instrument. Characteristics: value changes in response to underlying instrument, little/no initial investment, settled at future date. Manage price changes on commodity + interest rate volatility + foreign exchange rate volatility + financial risks (credit, liquidity, market risk:fv change due to market price change) , lock in future revenues or costs. Generate cash profit from trading, maintain market liquidity financial/nonfinancial meet definition of assets/liabilities on bs, fv, gains/losses on is. Aspe: not derivatives because difficult measure, recognized when goods delivered. Ifrs: not derivatives if no net settlement feature (settle for cash/other assets instead of delivery underlying asset)/net settlement feature but intends delivery underlying assets, Forward/future contracts: agreement buy/sell asset at future certain date + price transfers currency risk, credit risk, liquidity risk. Stock options: holder purchase shares specific term + price.