RSM435H1 Lecture Notes - Lecture 1: Standard Deviation, Futures Contract, Swap Execution Facility
Document Summary
Derivative: instrument whose value depends on value of more basic underlying variables. Trade standardized contracts that have been defined by the exchange. Trades either cleared through central counterparty or bilaterally. Bilateral trades usually includes credit support annex (csa) requiring one or both parties to provide collateral. Collateral acts like margin account in central counterparty. Transactional are larger in size but less volume. New regulations since financial crisis have made otc markets more similar to exchange. Standardized otc products must be traded on swap execution facilities. Ccp must be used as intermediary for standard products. Forward price: delivery price that would be applicable to a contract that is negotiated today. Contract has zero value to both sides at inception. Forwards are settled at end of life of contract. Where k=delivery price, st- spot price at maturity. Most futures contracts do not lead to delivery. Can close futures contract by entering into offsetting position.
