BU397 Lecture Notes - Lecture 1: Financial Instrument, Interest Rate Risk, Underlying
Document Summary
Primary financial instruments include most basic financial assets and financial liabilities. Derivatives are financial instruments that create rights and obligations, that transfer financial risk from one party to another. Derivative instruments derive their value from an underlying primary instrument, index, or non-financial item. They may trade on exchanges and over the counter markets. Have 3 characteristics: value changes in response to the underlying instrument, require little or no initial investment, settled at a future date. They transfer risks that are inherent in the underlying primary instrument without either party having to hold any investment in the underlying. Derivative instruments include: forwards, futures, options. Derivatives are used to manage financial risk: credit risk. Risk to one party that the other party will fail to meet an obligation: liquidity risk. Risk of not being able to meet own financial obligations: market risk.
