Derivatives

Although parity means equivalence, puts and calls are not equivalent. However, there is a relationship between the price of a call and its corresponding put option. This is referred to as put-call parity. Protective Puts and Fiduciary Calls First, let’s consider…

Another important concept in the pricing of options has to do with put-call-forward parity for European options. This involves buying a call and bond (fiduciary call) and a synthetic protective put, which requires buying a put option and a forward…

A forward rate agreement (FRA) is ideal for an investor or company who would like to lock in an interest rate. They allow participants to make a known interest payment at a later date and receive an unknown interest payment….

As the underlying value determines the option payoff, if we know the outcome of the underlying, we know the value of the option. If the underlying is above the exercise price at expiration, then the payoff is ST – X…

In an options contract, two parties transact simultaneously. The buyer of a call or a put option is the long position in the contract, while the seller of the option, also known as the writer of the option, is the…

By assessing the difference between the investors’ determination of the value of a stock or option versus the prevailing market price, investors can either buy or sell the asset to attempt to profit from this discrepancy. However, the same terminology…

Derivatives are a class of financial instruments that derive their value from the performance of basic underlying assets. These underlying assets can be equities (stocks), fixed income instruments (bonds), currencies, or commodities traded in cash or spot markets at cash…

There are multiple types of derivative contracts that are classified as forward commitments or contingent claims. Within the forward commitment universe, we find forward contracts, futures contracts, and swaps. On the other side of the spectrum, options (calls and puts),…

Derivatives typically fall into one of two classifications, either forward commitments or contingent claims. The primary difference between the two is around obligations. Forward commitments carry an obligation to transact, whereas contingent claims confer the right to transact, but not…

The primary purpose behind derivative contracts is the transfer of risk without the need to trade the underlying. This allows for more effective risk management within companies and the broader economy. In addition, the derivatives market plays a role in…