Management and Organizational Studies 1023A/B Chapter Notes -Call Option, Montreal Exchange, Forego

• School: Western University
• Department: Management and Organizational Studies
• Course: Management and Organizational Studies 1023A/B
• Professor: Maria Ferraro

Document Summary

Derivatives are contracts between two parties (a buyer and a seller) that have a price and that trade in specific markets. Derivatives are not dangerous but when in the hands of people who don"t understand them or have the wrong incentives, it is risky. A derivative is a financial position based on an underling asset. A small change in the underlying asset"s price usually means a much bigger change in the derivative"s value, up or down. Most common derivatives that big u. s. banks are involved in are swaps whereby two investors agree to trade the return on different assets. Banks often use interest rate swaps to protect themselves. Rather than trade directly in common stocks, investors can purchase securities representing a claim (an option) on a particular stock or group of stocks. This option gives the holder the right to receive or deliver shares of stock under specified conditions. The option does not need to be carried through.