MATBUS470 Lecture Notes - Lecture 1: Asset, Forward Price, Arbitrage
13 Mar 2018
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Financial instrument whose value depends on/ derived from the value of another asset. example: options, futures, forwards, swaps, options. Stock, currencies, interest rate, commodities, debt, insurance payouts (weather) Embedded options callable bonds, convertible bonds, segregated funds (issued by insurance company) Small market (value of underlying asset is a trillion) Banks, fund managers of corporations enter into direct contract with each other. No trading of contracts, cannot close out a position. Speculate: bet on the direction of the market. Change the nature of an investment without incurring the cost of selling the portfolio and buying another. An agreement between 2 parties negotiated today for a future sake. Forward price: determined when the contract is negotiated, paid on delivery. On may 24, 2010 a corporate treasurer entered into a long forward contract to buy 1 million in 6 months at an exchange rate of 1. 4422. If the spot rate increases, long position realizes a pro t.
