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Brief on Derivatives

Derivatives are contracts that secure future payments based on various assets, primarily used for hedging against market fluctuations or for speculative profit. Key types of derivatives include futures, options, and swaps, each with distinct characteristics and pricing methods, such as the Black-Scholes model for options. The document also mentions additional derivative types and emphasizes the importance of historical prices and volatilities in pricing derivatives.

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Mahammad Haneef
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4 views

Brief on Derivatives

Derivatives are contracts that secure future payments based on various assets, primarily used for hedging against market fluctuations or for speculative profit. Key types of derivatives include futures, options, and swaps, each with distinct characteristics and pricing methods, such as the Black-Scholes model for options. The document also mentions additional derivative types and emphasizes the importance of historical prices and volatilities in pricing derivatives.

Uploaded by

Mahammad Haneef
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Derivatives

Some of you may have difficulties in understanding some concepts of this course. This note
will throw some light on different derivative instruments. Comments and suggestions are
welcome.

Derivatives are contracts that establish/ secure future payments based in commodities,
currency, securities, index and market shares (Etc). The objective of derivatives operations is
usually to protect the company or investor from market variations, crisis, price drops - this
process is also called hedging. Some companies can also use derivatives in a speculative way
to make profit. The most popular derivative instruments are:

• Futures- Buying or selling an active in a future time. Buyer or seller agrees to buy or
sell a certain quantity of an asset for a price stipulated at a future date.
• Options- Future Contracts that can be executed or not, depending on the option
type and agreement. The most famous types of options are American and European.
European options can only be executed at the maturity date, while American options
can be executed any time until expiration date (an early execution can be
considered). The famous Black -Scholes model is known as the principal tool in
pricing options.
• Swaps- These are future contracts based in the currency or commodity exchange.
The exchange of the profitability index between two assets is negotiated through
this derivative contract.

This course also talks about other derivative types as Caplets and Floorlets (special types of
options) and Mortgage models (based in payments of principal and interest on the
underlying and pool of mortgages).

The main variables used for pricing are volatilities and historical prices. Traders will look for
historical curves of prices and volatilities to use as data for pricing derivatives. Moreover, it
is also used market information, speculation and tendencies in the processes of pricing.

I recommend Investopedia for those looking for simple language and explanation about
finances.

https://www.investopedia.com

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