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The Cost of Carry Model determines the futures or forward price of an asset by considering the costs associated with holding (or "carrying") the asset until the contract's maturity. These costs include storage, insurance, and financing expenses, offset by any ...

The Expectations Approach posits that the futures price reflects the market's consensus of the expected future spot price. Under this theory: [ F = E(S_T) ] Where: F: Futures price E(S_T): Expected spot price at maturity T This approach assumes that futur...

Contango A market condition where futures prices are higher than the current spot price. This situation often arises when there are costs associated with holding the asset, such as storage and financing. Investors are willing to pay a premium for future delive...

In futures trading, margin accounts are used to manage credit risk between parties. They ensure that both buyers and sellers can fulfill their contractual obligations. Initial Margin: The upfront deposit required to enter into a futures position. It acts as ...

Options are financial derivatives that grant the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price (known as the strike price) before or on a specified expiration date. This flexibility allows investors to h...

The concept of options has evolved significantly over time: Ancient Greece: The earliest recorded use of options dates back to ancient Greece, where the philosopher Thales of Miletus predicted a bountiful olive harvest. He paid a fee to reserve the use of o...

By Underlying Asset: Equity Options: Options on individual stocks. Index Options: Options on stock indices. Commodity Options: Options on physical goods like gold or oil. Currency Options: Options on foreign exchange rates. Interest Rate Options: Options...

1. Exercise Price (Strike Price): The price at which the underlying asset can be bought or sold if the option is exercised. Call Option: Benefits if the market price exceeds the strike price. Put Option: Benefits if the market price falls below the strike p...

Definitions: In-the-Money (ITM): Call Option: ( S_T > K ) Put Option: ( S_T < K ) At-the-Money (ATM): ( S_T = K ) Out-of-the-Money (OTM): Call Option: ( S_T < K ) Put Option: ( S_T > K ) Example: For a stock trading at $50: A call option wi...

Intrinsic Value and Time Value of an Option Intrinsic Value: The immediate gain if the option is exercised. Formula: Call Option: ( \text{Max}(S_T - K, 0) ) Put Option: ( \text{Max}(K - S_T, 0) ) Time Value: The additional value of the option above its i...

Forwards and futures contracts are two fundamental types of financial derivatives that allow market participants to manage risk, speculate on price movements, or lock in prices for future transactions. Both contracts involve agreements to buy or sell an asset ...

Forwards and futures contracts are two primary types of financial derivatives used for hedging, speculation, and managing financial risks. While both contracts involve agreements to buy or sell an asset at a future date, they differ in terms of their features,...

Forwards Contracts 1. Negotiation and Agreement Customization: Forward contracts are customized agreements between two parties, allowing them to negotiate the terms of the contract, including the price, quantity, settlement date, and delivery method. This f...

Aspect Forwards Contracts Futures Contracts Trading Venue Over-the-counter (OTC) market, privately negotiated between parties. Traded on regulated exchanges, such as the Chicago Mercantile Exchange (CME). Contract Customization Fully customizable: ter...

Introduction Derivatives are financial instruments whose value is derived from the value of an underlying asset, index, or rate. The primary purpose of derivatives is to hedge risk, but they are also widely used for speculation and arbitrage. Derivatives can b...

Financial derivatives have evolved significantly over centuries, transforming from simple, informal agreements to complex financial instruments that are integral to modern global markets. Their development has been driven by the need to manage risk, enhance in...

Financial derivatives are powerful instruments that play a vital role in the global financial system. They allow participants to hedge risks, speculate on market movements, and improve market efficiency. The participants in the derivatives market come from div...

Financial derivatives can be broadly categorized into two main types based on where and how they are traded: Exchange-Traded Derivatives (ETDs) and Over-the-Counter (OTC) Derivatives. These two categories differ significantly in terms of their trading platform...

1. Forwards Contracts A forward contract is a customized agreement between two parties to buy or sell an asset at a specified price on a future date. Forwards are traded over-the-counter (OTC), allowing the terms of the contract to be tailored to the specific...

Swaps Swaps are contractual agreements between two parties to exchange cash flows or financial instruments over a specified period. They are primarily used to manage exposure to fluctuations in interest rates, currency exchange rates, and other financial varia...