RSM230H1 Lecture Notes - Lecture 9: Credit Risk, Forward Price, Call Option
Document Summary
Value dependent on value of another underlying asset i. e. individual stocks, commodities, foreign exchange rates. Three types of derivative contracts (for&op: otc; fut&op: exchanges) Oblige two parties to exchange a predetermined quantity of underlying asset at a fixed price sometime in future. Forward - price for delivery at a specified date in future. Selling us forward is the same as buying cdn forward. Gives buyer the right (not obligation) to buy and sell a fixed quantity of the underlying asset at a predetermined price sometime in future. Seller obligated to fulfill contract if called on. Exercise (strike) price - price at which option can be converted into underlying asset. Expiry date - end of period during which you can exercise the option. Intrinsic value - value of option if it is immediately exercised. European (versus american) - options can be exercised only at maturity. Premium - amount paid for the option (per contract)
