RMIN 317 Lecture Notes - Lecture 2: Credit Risk, Performance Bond, Option Style
9 Dec 2017
School
Department
Course
Professor
Document Summary
To create a market we need hedgers on both sides. Financial derivative value of something else, an underlying asset. A stock, a bond, an index, foreign currency, commodities, or interest rates. Can be subcategorized may be used to reduce financial price risk. In exchange for the payment of a premium (the price of the. Acquires the right, but not option), the buyer of an option the obligation , to buy or sell an underlying instrument or commodity under specific terms and conditions. By paying a premium upfront, and through owning the option contract, they have the power to buy/sell the underlying asset under a certain price/date. Non-linearity : since the owner of an option is not obligated to exercise the option, payoffs are asymmetrical. one party"s gain is not necessarily another party"s loss. Customization : options are available both otc and on formal exchanges.
