Derivatives in Finance

Study Notes

A derivative is a financial instrument that derives its value from an underlying asset, such as a stock, commodity, or currency.
Derivatives are used to manage risk, speculate on price movements, or leverage investments.

Forwards: Customized contracts between two parties to buy or sell an asset at a set price on a specific date.
Futures: Standardized contracts traded on an exchange, similar to forwards, but with standardized terms and conditions.
Options: Contracts giving the buyer the right, but not the obligation, to buy or sell an asset at a set price on or before a specific date.
Swaps: Agreements to exchange a series of cash flows based on different underlying assets or indices.

Notional value: The value of the underlying asset upon which the derivative is based.
Underlying asset: The asset from which the derivative derives its value, such as a stock or commodity.
Strike price: The price at which the derivative can be exercised or settled.
Expiration date: The last date on which the derivative can be exercised or settled.

Risk management: Hedging against potential losses or gains in an underlying asset.
Speculation: Betting on the price movement of an underlying asset.
Leverage: Increasing potential returns by using a small amount of capital to control a larger position.

Benefits: Increased market efficiency, improved risk management, and enhanced investment opportunities.
Risks: Uncontrolled speculation, market volatility, and potential losses due to leverage.

Delta: The rate of change of the derivative's value with respect to the underlying asset's price.
Gamma: The rate of change of the derivative's delta.
Theta: The rate of change of the derivative's value with respect to time.
Vega: The rate of change of the derivative's value with respect to volatility.

Derivatives are financial instruments that derive their value from an underlying asset, such as stocks, commodities, or currencies.
Derivatives are used to manage risk, speculate on price movements, or leverage investments.

Forwards: Customized contracts between two parties to buy or sell an asset at a set price on a specific date.
Futures: Standardized contracts traded on an exchange, similar to forwards, but with standardized terms and conditions.
Options: Contracts giving the buyer the right, but not the obligation, to buy or sell an asset at a set price on or before a specific date.
Swaps: Agreements to exchange a series of cash flows based on different underlying assets or indices.

Notional value: The value of the underlying asset upon which the derivative is based.
Underlying asset: The asset from which the derivative derives its value, such as a stock or commodity.
Strike price: The price at which the derivative can be exercised or settled.
Expiration date: The last date on which the derivative can be exercised or settled.

Risk management: Hedging against potential losses or gains in an underlying asset.
Speculation: Betting on the price movement of an underlying asset.
Leverage: Increasing potential returns by using a small amount of capital to control a larger position.

Benefits: Increased market efficiency, improved risk management, and enhanced investment opportunities.
Risks: Uncontrolled speculation, market volatility, and potential losses due to leverage.

Delta: The rate of change of the derivative's value with respect to the underlying asset's price.
Gamma: The rate of change of the derivative's delta.
Theta: The rate of change of the derivative's value with respect to time.
Vega: The rate of change of the derivative's value with respect to volatility.