Financial Modelling 2557A/B Chapter Notes - Chapter 1: Arbitrage, Market Maker, Financial Engineering
17 Apr 2017
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Document Summary
Derivative: a financial instrument that has a value determined by the price of something else. Bet on the price of something - insurance against price increases/decreases. Over-the-counter: traders trade financial claims directly with a dealer, bypassing organized exchanges. Trading volume: # of financial claims that change hands daily or annually. Market value: sum of market value of claims that could be traded. Notional value: scale of a position, with reference to some underlying asset. Open interest: measurement of total number of contracts for which counterparties. More frequently traded: with derivatives, sellers can enter into contracts that make payments when prices are low. Reduces risk of loss for the seller - they are hedging: all types of insurance are derivatives. Can provide way to make highly leveraged bets and tailor to specific view. Is possible to trade derivatives instead of selling stocks and buying bonds to achieve the o o same economic effect.
