With commodity derivatives, investors can profit from certain products without actually possessing them. The original objective behind using commodity derivatives was to provide a means of risk protection for farmers where they could promise to sell crops in the future for pre-determined prices.
Price speculation: Trading in commodity derivatives presently is popular with people not involved in the commodities industry and they use this investment tool to speculate on price. Their focus is mainly on supply and demand and they trade on estimations of prices either rising or falling. They make profits when the price of a commodity they have invested in move in their favor. Similarly, they lose money if the price moves in the opposite direction
A trader who buys a derivative contract also buys the right to exchange a commodity for a certain price at a future date. Such a contract buyer can buy the commodity but does not have to pay for the full value of the commodity that he intends buying. What is needed as payment is only a small percentage, known as the margin price.
The person who accepts such a margin price is called a contract seller. He strikes an agreement with the buyer to sell the commodity stated in the contract at a certain price and on a certain date. Traditionally, both the buyer and the seller are required to honor the agreement in spite of any losses that might occur. For instance, a trader may buy a contract from a seller for rights to a ton of tea leaves for Rs 100,000 on a certain date.
The buyer may be required to pay a minimum of Rs10,000 to the seller initially. And on the stipulated date, the seller will transfer the rights of the tea leaves to the buyer. If the current value of the tea leaves is higher than the contract rate, the buyer makes a profit, but if it is lower, he will have to purchase the tea leaves at a loss.
In December 1999, the Securities Contract Regulation Act (SCRA) was amended to include derivatives within the domain of ‘securities’ and the required regulatory framework developed for governing derivatives trading. Actual trading in derivatives commenced in India in June 2000 following the approval by the Securities and Exchange Board of India (SEBI). It permitted the derivative segments of two stock exchanges, the NSE and BSE, and their clearing houses to commence trading and settlement in approved derivatives contracts.
However, equity derivatives have had a long history in India in the over-the-counter (OTC) market. Options such as Teji, Mandi and Fatak in unorganized markets were traded as early as 1900 in Mumbai. The Reserve Bank of India (RBI) first permitted foreign currency options in currency pairs other than the Rupee. Since then, it has permitted options, interest rate swaps, currency swaps and other risk-reductions OTC derivative products.
The clearing and settlement of all trades on the derivative segments must go through a clearing house which functions as an independent entity from the derivative exchange or segment.
The SEBI-constituted Dr. L.C. Gupta Committee has laid down the regulatory framework for derivative trading in India. The regulator has also decreed suggestive by-laws for the derivative exchanges and their clearing houses which include the provisions for trading and settlement of derivative contracts.
Furthermore, the rules, by-laws and regulations of the derivative segment of the exchanges and their clearing houses have to conform to the suggestive by-laws. The SEBI has also provided the eligibility conditions for derivative exchanges and their clearing houses. Conditions have been set up to ensure that these entities provide a transparent trading environment, are safe and function with integrity as also for providing facilities to redress investor grievances. Moreover, an investor's money has to be kept separate at all levels and must be used only against the liability of the investor.
Derivatives trading can be a good alternative for those interested to trade outside of traditional stocks and bonds. Derivatives yield gains over a period of time based on the performance of the underlying assets traded in. Indicators that affect a derivative's performance are diverse and depend on the derivative type. They can be the stock market index, consumer price index, weather conditions and fluctuations in currency exchange rates.
Trading in derivatives usually does not mean the actual purchase of an underlying asset but an investor takes a risk on the asset’s performance. This does not mean that the investor will not lose money but the risk is relatively less than making an investment. Derivatives trading also allow a much lower initial investment, a good choice for those who cannot or do not want to invest huge amounts in purchasing stocks. Further, derivatives also allow a trader to add balance to his total portfolio and he can spread the risk involved across a range of investments.
If an investor is looking for an investment opportunity that can yield profits in a shorter period, derivatives is a good option. Unlike some stocks and bonds which have to be invested for long periods many years, investments in derivatives can be for a few days, weeks, or a few months. This can provide an investor with the opportunity of breaking into the market and also mixing short and long-term investments.
Derivatives in essence mean that trading opportunities in this type of investment is unlimited. However, careful research is very essential if an individual is eager to enter this market, while he should also have a trusted financial representative to assist him. The best option is to be armed with both.
A security whose price depends upon or is derived from an underlying asset such as a commodity, bond, equity and currency is called a derivative. The derivative itself is only a contract between two or more parties and fluctuations in the underlying asset determine its value. Since derivatives have no value of their own, they are not standalone assets. But some common types of derivatives are traded in markets before their expiration dates as though they are assets.
Investors use derivatives mainly for leveraging so that even if the underlying value makes a slight movement, there can be a huge difference in the value of the derivative.
Investors also use them to speculate and can make considerable profits if the underlying asset’s value reaches a level they expect it to.
Hedging is aimed at reducing risk in the underlying asset by entering into a derivative contract whose value directional move is opposite to their underlying position thereby acting as a counterbalance.
Directives are further used to gain exposure to the underlying asset as part of a risk management strategy to reduce risk associated with inclement weather conditions.
Under the option ability, the value of the derivative is connected to a certain condition or event such as the underlying asset reaching a specific price level.
OTC are contracts that are negotiated privately between two parties without using an intermediary such as a stock exchange.
These derivative instruments are traded via specialized derivative exchanges.
These contracts allow the buying or selling of an asset on or before a future date determined at the present.
Options are contracts that give the owner the right, but not the obligation, to buy or sell an underlying asset.
Swaps allow cash flows on or before a specified future date based on the underlying value of an asset.
Equity derivatives are instruments with underlying assets based on equity securities. Their values fluctuate with changes in their underlying assets’ equity, which is usually measured by share price. The most common equity derivatives are options and futures.
The most important aspect of equity derivatives are that they allow traders to transfer risks associated with the underlying securities. This is usually done by buying or selling options or combinations of options against the cash or futures of the underlying security, the vast majority of which are traded on the stock exchanges. Alternatively, market counterparties can also trade such products against each other on an OTC or off-exchange basis.
These are the most common type of equity derivatives. They provide a trader the right, to buy or sell a quantity of stock at a set price within a certain period of time but before the expiry date.
Convertible bonds can be converted into shares of stock in the issuing company, usually at a pre-announced ratio. They are also called hybrid securities as they have both features of debt and equity. Investors can use them to obtain the benefit of equity-like returns while safeguarding the drawback with regular bond-like coupons.
These can be used to reproduce the performance of an underlying stock market index. These contracts can also be used for hedging against an existing equity position as well as for or speculating on the index’s future movements.
These consist of more than one stock or stock market index. The baskets can be composed of stocks from one or more industries while they can also be designed to replicate broad market indices. In the latter case, a basket may be used rather than the full index because some index components do not trade actively.
Fixed income derivatives are investments for which fixed payments are received in periodic installments until the principal amount is paid out at maturity. Payments under this investment type are known in advance unlike in variable-income securities where payments change based on certain underlying measures such as short-term interest rates. For example, if a government bond offers 5% as the fixed-rate, then an investment of Rs1, 000 would yield Rs50 as annual payment until maturity when the investor would receive his principal Rs1, 000 back. These types of assets usually offer lower returns on investment because they guarantee income.
Interest rate derivatives and credit derivatives come under fixed income derivatives. In an interest rate derivative, the underlying asset is the right to pay or receive a notional amount of money at a fixed interest rate. Generally, investors with customized cash flow needs or certain views on the interest rate movements use these OTC-traded financial instruments. The interest rate derivative has the largest derivatives market in the world. Meanwhile, credit derivatives are privately held negotiable bilateral contracts that allow users to manage their exposure to credit risk. They are financial assets like forward contracts, swaps, and options for which the price is driven by the credit risk of private investors or governments.
derivatives are also often included as fixed income derivatives. These are a subclass of derivative used by individuals to alleviate the effects of potential high inflation levels. The most common under this type are swaps, in which the cash flows of one party are linked to a price index while those of the counterparty are connected to a conventional fixed or floating cash flow.
Besides these, there is a wide range of fixed income derivative products such as options, credit default swaps, interest rate swaps, inflation swaps, government bond futures, interest rate futures and forward rate agreements.
With a foreign exchange (forex) derivative, the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-determined exchange rate and date. The forex derivatives market is the largest market in the world, with over $US1 trillion traded every single day.
Forex derivatives are principally used for speculating and hedging. Hedgers use forex financial contracts futures to mitigate risk by insulating themselves against potential price shifts in the future. One the other hand, speculators take risks with profit as their objective.
One of the major advantages of using forex derivatives is the availability of trade spreads that are normally lower, often less than three points. Transaction costs are also usually lower with the buyer enjoying more leverage for each contract.
On the demerit front, there is a need for higher capital investments which cannot be afforded by retail investors, the mandatory fees, and the time limitations as forex derivatives can only be used during an exchange trading session.
Trading strategies are generally the same as standard trading methods while using forex derivatives for speculation. The history and turning points of the currency are evaluated by the method of trend analysis. However, more complex methods are also used to determine the country’s economic indicators and political climate.
Forex derivatives are often used for hedging to protect sales revenue. For example, an Indian company with stores in England will be making sales in pounds but needs to receive the income in rupees. In such situations, a forex derivative will allow the firm to purchase a contract in the amount of expected sales in order to erase any changes in the currency market. Forex derivatives may also be in the form of forwards where the underlying cash is not paid until the date of expiry.
An option with a predetermined payoff if the underlying instrument is at or beyond the strike price on expiration. Payoff takes place only when the option is at or beyond the strike price and not below the strike price.
American options are options that can be exercised any time up to the expiration date. Most exchange-traded options are American.
The simultaneous purchase and sale of a commodity or financial instrument in different markets to take advantage of a difference in price or exchange rate.
An at-the-money (ATM) option is an option that would lead to zero cash flow if it were to be exercised immediately. An Index option is at-the-money when the current index level (spot price) equals the strike price (i.e. spot price = strike price).
A path dependant option that calculates the average of the path traversed by the asset. It can be arithmetic or weighted average. The payoff therefore is the difference between the average price of the underlying asset over life of the option and exercise price of the option.
A backwardation starts when the difference between forward price and spot price is less than the cost of carry, or when there can be no delivery arbitrage because the asset is not currently available for purchase. It is the opposite of �contango.�
For a futures contract, it is the difference between the cash price and the futures price observed in the market. The basis will narrow as a contract moves closer to settlement / expiry.
Basket options are options on portfolios of underlying assets rather than a single underlying asset. The underlying asset is usually a moving average of a basket of assets. Equity index options are a form of basket options.
These are options that have an embedded price level (barrier), which if reached will either create a vanilla option or eliminate the existence of a vanilla option. The existence of predetermined price barriers in an option makes the probability of pay off quite difficult. A buyer purchases a barrier option for decreased cost and the increased leverage.
A benchmark is basically a reference point. It is the practice of comparing the performance of an individual instrument or a portfolio. It can also be called an approach to risk management to a pre-determined alternative approach.
This option is located somewhere between a European style option which can be exercised only at maturity and an American style option which can be exercised any time the option holder chooses. Bermuda option can be exercised only on predetermined dates.
It is a closed-form equation used for valuing plain vanilla options. It was developed by Fischer Black and Myron Scholes in 1973 for which they were awarded with the shared Nobel Prize in Economics.
It is a complex option strategy which involves buying a call option with a relatively low strike price, buying another call option with a relatively high strike price and selling two call options with an intermediate strike price. It is a bear call spread stacked on top of a bull call spread. This can also be practiced for put options. The payoff diagram for this type of spread resembles a butterfly shaped and thus it is called a butterfly spread. A perfect Butterfly spread would require no net premium payment.
Buyer of an option The buyer of an option is the one who by paying the option premium buys the right but not the obligation to exercise his option on the seller / writer.
A call option gives the holder the right but not the obligation to buy an asset at a certain date for a certain price.
A combination of options in which the holder of the contract has bought an out-of-the money option call (or put) and sold an (or more) out-of-the-money puts (or calls). This will lock in the minimum and maximum rates that the collar owner will use to transact in the underlying on expiry.
This is simply an option on an existing option such as a call on a call, a put on a put, a call on a put etc.
Contango means NEGATIVE basis, where the cash price is less than the future price. When there is adequate supply, negative basis becomes a norm in the market. Another term for Contango can be Premium.
A financial instrument is said to be convex (or to possess convexity) if the financial instrument's price increases or decreases faster or slower than corresponding changes in the underlying price.
Correlation is a statistical measure describing the extent to which prices of different instruments move together over time. It can be positive or negative. Instruments that move together in the same direction to the same extent have highly positive correlations while moving together in opposite direction to the same extent has highly negative correlations. Correlation between instruments is not stable.
The cost of carry is the cost of holding a position. In a long position, it is the cost of interest paid on a margin account. In a short position, it is the cost of paying dividends, or opportunity cost of purchasing a particular security rather than an alternative.
A technique used by investors to help fund their underlying positions, mostly used in the equity markets. An individual who sells a call is said to "write" the call. If an individual sells a call on a notional amount of the underlying that he holds in his inventory, then the written call is said to be "covered" (by his inventory of the underlying). If the investor does not have the underlying in inventory, the investor has sold the call "naked".
A contract to exchange units of one currency into another with the premium paid (usually) in a third currency.
The daily settlement price at the end of each day is the weighted average price of the last half an hour of the futures contract. The profits / losses arising from the difference between the trading price and the settlement price are collected / given to the concerned clearing members.
It is the sensitivity of change in the financial instrument's price to change in the price of the underlying cash index.
Derivatives are financial contracts whose value is dependent on the behavior of price of one or more basic assets (known as the underlying). These contracts are legally binding agreements to buy or sell an asset in future. They are traded on a recognized exchange. The underlying asset can be a share, index, interest rate, bond, rupee / dollar exchange rate, any commodity.
Options that can be structured as a "one touch" barrier, "double no touch" barrier and "all or nothing" call / puts.
An option which provides a payoff upon expiration if the currency does not touch both the upper and lower price barriers selected at the outset.
An option that gives the buyer the right to buy and / or sell a futures contract, at a premium, at a strike price is called a Double option
A type of knock-out barrier option that ceases to exist when the price of the underlying security hits a specific barrier price level. If the price of the underlying does not reach the barrier level, the investor has the right to exercise their European call or put option at the exercise price specified in the contract.
A hybrid security that is embedded in a non-derivative instrument. An embedded derivative can modify the cash flows of the host contract because the derivative can be related to an exchange rate, commodity price or some other variable which frequently changes.
European options are options that can be exercised only on the expiration date itself. European options are easier to analyze than American options, and properties of an American option are frequently deduced from those of its European counterpart.
The exercise price is the price at which a call / put buyer can buy or sell the underlying instrument.
An option that differs from common American or European options in terms of the underlying asset or the calculation of how or when the investor receives a certain payoff. These options are more complex than options that trade on an exchange, and generally trade over the counter.
Expiration date The date specified in the option contract is known as the expiration date, the exercise date, the strike date or the maturity.
It is the closing value of the underlying index on the last trading day for Index Option contract
A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today's pre-agreed price.
A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that they are standardized exchange-traded contracts.
Gamma or convexity is the degree of curvature in the financial contract's price curve with respect to its underlying price. It is the rate of change of delta with respect to changes in the underlying price. Positive gamma is favorable. Negative gamma is damaging in a volatile market. Only instruments with time value have gamma.
A large pool of private money and assets managed aggressively and often riskily on any futures exchange, mostly for short-term gain.
Any security that combines two or more different financial instruments. Hybrid securities generally combine both debt and equity characteristics. The most common example is a convertible bond that has features of an ordinary bond, but is heavily influenced by the price movements of the stock into which it is convertible.
Historical volatility is the measure of a stock�s price movement based on its historical prices. It measures how active a stock price typically was over a certain period of time.
Implied Volatility is the volatility of an instrument as implied by the price of an option on that instrument, calculated using an options pricing model.
These options have the index as the underlying. Some options are European while others are American. Like index futures contracts, index options contracts are also cash settled.
A swap where the notional principal amount of the agreement is amortized according to the movement of an underlying rate. i.e. the underlying Index
An in-the-money option is an option that would lead to a positive cash flow to the holder if it were to be exercised immediately. An Index call option is said to be in-the-money when the current index level is higher than the strike price (i.e. spot price > strike price). If the index is much higher than the strike price, the call is said to be deep ITM. In the case of a put, the put is ITM if the index is below the strike price.
The intrinsic value of a call is the amount the option is ITM, if it is ITM. If the call is OTM, its intrinsic value is zero. In numeric terms, the intrinsic value of a call is Max [0, (St � K)] where St is the spot price and K is the strike price. Intrinsic value of a put is Max [0, K � St].
Swapping only the interest related cash flows between the parties in the same currency is known as Interest rate swap.
Trading by telephone or by other means that takes place after the official market has closed. Originally it took place in the street on the kerb outside the market. Also known as Street Dealings not permitted under by the Bye-laws and Regulations.
There are two kinds of knock-in options, i) up and in, and ii) down and in. With knock-in options, the buyer starts out without a vanilla option. If the buyer has selected an upper price barrier and the currency hits that level, it creates a vanilla option with maturity date and strike price agreed upon at the outset. This would be called an up and in. The down and in option is the same as the up and in, except the currency has to reach a lower barrier. Upon hitting the chosen lower price level, it creates a vanilla option.
An option the existence of which is conditional upon a pre-set trigger price trading before the option's designated maturity. The option is deemed to exist unless the trigger price is touched before maturity.
The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of up to three years.
It gives the holder the right to buy an asset at a certain price (exercise price) in the future by paying a premium. It�s a bullish strategy where the investor expects the asset price to increase.
This is also a bearish strategy which gives the holder the option to sell an asset at a certain price at a future date by paying a premium. Consider that a trader buys an American put option expiring after a fortnight to sell 1,200 Satyam Computers Ltd shares at a strike price of Rs 290 by paying a premium of Rs 2/share. Thus, the trader invests Rs 2,400 and his/her BEP is Rs 288/share. If Satyam�s price is Rs 280, then, the trader will exercise his/her option and profit by Rs 9,600 [(Rs.290-280-2) x 1,200 shares]. However, if the price is above Rs 290, then the trader won�t exercise the option and he/she will lose Rs 2,400 - see Figure 3.
An option which gives the owner the right to buy (sell) at the lowest (highest) price that traded in the underlying from the inception of the contract to its maturity, i.e. the most favorable price that traded over the lifetime of the contract.
A demand from a clearing house to a clearing member or from a broker to a customer to bring deposits up to a required minimum level to guarantee performance at ruling prices.
A process of valuing an open position on a futures market against the ruling price of the contract at that time, in order to determine the size of the margin required.
A participant in the financial markets who guarantees to make simultaneously a bid and an offer for a financial contract with a pre-set bid/offer spread (or a schedule of spreads corresponding to different market conditions) up to a pre-determined maximum contract amount..
An outperformance option with a payoff determined by the difference in performance of two or more indices.
An option granted without any offsetting physical or cash instrument for protection. Such activity can lead to unlimited losses.
When there are cash flows in two directions between two counterparties, they can be consolidated into one net payment from one counterparty to the other thereby reducing the settlement risk involved.
The "one touch" digital provides an immediate payoff if the currency hits your selected price barrier chosen at the outset.
The Open Interest for a futures or option is the number of contracts outstanding (not close / delivered) at any given point of time.
The potential for loss attributable to procedural errors or failures in internal control.
Options are of two types - calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date.
A pattern of months in which option contracts usually expire (usually a nine month period). There are three common cycles: JAJO - January, April, July, and October; MJSD - March, June, September, and December; FMAN - February, May, August, and November
Option price is the price determined by exchange which the option buyer pays to the option seller. It is also referred to as the option premium.
A specific set of calls or puts on the same underlying security, in the same class and with the same strike price and expiration date.
An out-of-the-money (OTM) option is an option that would lead to a negative cash flow if it were exercised immediately. A call option on the index is out-of-the-money when the current index stands at a level which is less than the strike price (i.e. spot price < strike price). If the index is much lower than the strike price, the call is said to be deep OTM. In the case of a put, the put is OTM if the index is above the strike price.
An option with a payoff based on the amount by which one of two underlying instruments or indices outperforms the other.
Any transaction that takes place between two counterparties and does not involve an exchange is said to be an over-the-counter transaction.
The cost associated with a derivative contract, referring to the combination of intrinsic value and time value. It usually applies to options contracts. However, it also applies to off-market forward contracts.
This is a strategy an investor holding a particular stock can use. If the investor feels that a correction is due for that stock, instead of selling the stock, the investor can buy a put and thus minimize his loss on the downside.
A put option gives the holder the right but not the obligation to sell an asset by a certain date for a certain price.
Put Call Ratio is the number of Put options Open Interest in a given day divided by the number of Call options Open Interest in same day. If the PCR is high, there are more Put options trading in the market, it means that more people are buying a right to sell i.e. more people want to sell in the future-an indicator of bearishness. If the PCR is lower then it indicates bullishness, as more people want to buy in the future.
A long position in a put combined with a long position in the underlying forward instrument, both of which have the same delivery date has the same behavioral properties as a long position in a call for the same delivery date. This can be varied for short positions, etc.
This is an option designed to eliminate currency risk by effectively hedging it. It involves combining an equity option and incorporating a predetermined fix rate. Example, if the holder has an in the- money Nikkei index call option upon expiration, the quanto option terms would trigger by converting the yen proceeds into dollars which was specified at the outset in the quanto option contract. The rate is agreed upon at the beginning without the quantity of course, since this is unknown at the time.
This type of option is a combination of two or more options combined each with its own distinct strike, maturity, etc. In order to achieve a payoff, all of the options entered into must be correct.
The potential for loss stemming from changes in the regulatory environment pertaining to derivatives and financial contracts, the utility of these instruments for different counterparties, etc.
The sensitivity of a financial contract's value to small changes in interest rates
A parametric methodology for calculating Value-at-Risk using data conditioned by JP Morgan's spin-off company Risk Metrics that is most useful for assessing portfolios with linear risks.
An option with a payoff in a different currency than the underlying�s trading currency.
The risk of non-payment of an obligation by a counterparty to a transaction, exacerbated by mismatches in payment timings.
This is a bearish strategy whereby the option seller/writer expects the asset price to fall and is obliged to sell the asset if the option buyer wishes to buy at a specified price. Now, say a call is sold for Rs 50 on 1,800 Tisco shares, with a strike price of Rs 310 when the stock price is Rs 300. The option writer collects Rs 90,000 (Rs 50 x 1,800 shares) in advance. The buyer of this option will exercise his/her option only if the price exceeds Rs 310. Correspondingly, the option writer will make a profit if the price is less than Rs 360 (see Figure 2).
This is a bullish strategy where the option writer is selling a put, which is an obligation to buy if the buyer of the option chooses to exercise his/her sell option. The buyer of this put option would do so, if the price falls. If the option writer sells a put on 600 Reliance Industries Ltd shares expiring after a month for Rs 15 with a strike price of Rs 500, then the buyer of this option will exercise his/her option only if the price is less than Rs 500. Correspondingly, the option writer will make a profit, if the price is above Rs 485 (Rs 500-15) - see Figure 4.
Taking positions in financial instruments without having an underlying exposure that offsets the positions taken.
The price in the cash market for delivery using the standard market convention. In the foreign exchange market, spot is delivered for value two days from the transaction date or for the next day in the case of the Canadian dollar exchanged against the US dollar.
The difference between the bid and asked prices in any market.
In finance, a statistical measure of dispersion of a time series around its mean; the expected value of the difference between the time series and its mean; the square root of the variance of the time series.
Stock options are options on individual stocks. Options currently trade on over 500 stocks in the United States. A contract gives the holder the right to buy or sell shares at the specified price.
An order placed in the market to buy or sell to close out an open position in order to limit losses when the market moves the wrong way.
The simultaneous purchase and sale of the same commodity to different delivery months or different strategies.
The price specified in the options contract is known as the strike price or the exercise price.
Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used swaps are: Interest rate swaps and Currency swaps
Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus a swaption is an option on a forward swap. Rather than have calls and puts, the swaptions market has receiver swaptions and payer swaptions. A receiver swaption is an option to receive fixed and pay floating. A payer swaption is an option to pay fixed and receive floating.
A sequence of options of the same type, usually covering non-overlapping time periods and often with variable strikes.
The sensitivity of a derivative product's value to changes in the date, all other factors staying the same.
The time value of an option is the difference between its premium and its intrinsic value. Both calls and puts have time value. An option that is OTM or ATM has only time value. Usually, the maximum time value exists when the option is ATM. The longer the time to expiration, the greater is an option's time value, all else equal. At expiration, an option should have no time value.
The currency, commodity, security or any other instrument that forms the basis of a futures or options contract.
The call pays off early if an early exercise price trigger is hit. The put expires worthless if the market price of the underlying risks is above a pre-determined expiration price.
The change in the value of a financial instrument attributable to a change in the relevant interest rate by 1 basis point (i.e. 1/100 of 1%).
The calculated value of the maximum expected loss for a given portfolio over a defined time horizon (typically one day) and for a pre-set statistical confidence interval, under normal market conditions
An option contract with no special or unusual features and has a standard expiry date and strike price.
The sensitivity of a derivative product's value to changes in implied volatility, all other factors staying the same.
In finance, a statistical measure of dispersion of a time series around its mean; the expected value of the difference between the time series and its mean; the square root of the variance of the time series.
Options generally have lives of upto one year; the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter.
The writer of a call/put option is the one who receives the option premium and is thereby obliged to sell / buy the asset if the buyer exercises on him.
An option with an exercise price of zero, or close to zero, traded on exchanges where there is transfer tax, owner restriction or other obstacle to the transfer of the underlying.