ACTSC446 Lecture 1: ACTSC446 notes_1_scratch.pdf

• School: University of Waterloo
• Department: Actuarial Science
• Course: ACTSC446
• Professor: Bin L I

Document Summary

Derivative: a nancial instrument whose price is determined by the price of one or more underlying assets. Underlying asset: an asset, basket of assets, or even another derivative. There must be an independent way to determine its value. Suppose you want to buy 1 oz. of gold at the end of this year (the current price is around ). You are considering to make a contract with a gold seller. If the price of 1 oz. of gold at the end of this year is greater than , you get from the seller. For you: reduce the loss if the price is high. For the seller: reduce the loss if the price is low. Over-the-counter (otc) derivatives signi cantly larger market privately traded less transparency (price) low liquidity high credit risk the lower fees and taxes greater freedom. End-user: they use derivatives to manage risk, speculate, reduce costs, or avoid regulation.