FINC314 Lecture Notes - Lecture 27: Credit Default Swap, Credit Risk, Call Option
Document Summary
Options styles, payoff diagrams, and basic usage. Periodically this semester, derivatives have entered into our discussions. In this lecture, and the several which follow, we examine derivatives in significantly more depth in terms of both logic and pricing starting with options this evening. Across-the-board, this is challenging material; however, a clear understanding of it (and an ability to communicate this understanding) will set you apart from most everyone else without and within the industry. Put another way, derivatives are an instrument of risk reallocation utilized by both those who want to shed risk (hedgers) to those who want to expose themselves to it (speculators). A given derivative contract may have hedgers on both sides, speculators on both sides, or both a hedger and a speculator as counterparties. Derivative securities come in many different forms, shapes, and sizes; however, we are going to focus on the major categories: