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Lecture

Management and Organizational Studies 1023A/B Lecture Notes - Futures Exchange, Glossary Of English-Language Idioms Derived From Baseball, Option Style


Department
Management and Organizational Studies
Course Code
MOS 1023A/B
Professor
Kate Helsen

Page:
of 2
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
30th 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
Put buyer – going up – bullish. Going down – bearish
Options Trading
Options Exchanges
Standardize – purpose is to simplify the process of entering into contracts
Purchases going through Canadian Derivatives Clearing Corporation – the
intermediary. Make sure both parties come through – take contracts,
guarantee settlement. Making sure the writer has the money and shares,
and follow through.
Clearing corporation balance = zero.
Rights – expire in a few months
Warrant – often expires after several years
Your local grocery store had turkeys on sale, but unfortunately were sold out. The
cashier gave you a raincheck that allows you to purchase a turkey any time in the
next month at the sales price. This is an example of a(an)
A Bermudan option
b American option
c European option
d Thanksgiving option
Correct: b
Futures Markets
Setting an obligation
Spot or Cash Market – eg. Paying gas – paying the price right away, getting the
good right away
Forward Market – eg. Agreed-upon price, delivered later
Futures market – standardized trading.