MOS 1023 Mar 20

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Western University
Management and Organizational Studies
Management and Organizational Studies 1023A/B
Kate Helsen

Mar 20 – Derivatives “Future” = involving risk – Value of the derivate is based on whatever the underlying security is – Not trading shares – we are trading the opportunity to buy shares Why? – Risk – a way to mitigate risk, expand investment opportunities – Cheaper to invest in a derivative than shares themselves – Lower cost – getting a return on the share, rather than buying the share – Leverage – same amount of investment, but get a more magnified return Options – On any financial security i.e. Bonds, debt (focus on shares) – Company is not involved – The buyer always makes the decision as to whether these options are exercised. Terminology – American option (most common – allows buyer flexibility to allow them to exercise the contract when it is in their best interest) – exercised up to June 30 at any point and time. European: only on June 30. Bermudan: a series of dates How Options Work – If both parties think the stock is going to go up – won't work. Both must have opposite ideas – zero sum game – P
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