Summary
Summary Operational financial risk management: derivatives
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- Institution
Derivative: If value of financial instrument is based on the value of another financial instrument.
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lOMoARcPSD|837380Financial risk management - options - F000738 A - Keuleneer
Valuation and Risk management (Universiteit Gent)
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, lOMoARcPSD|837380
OPTIONS
Being long and short in something is not the same as buying and selling.
• You are long in something if that something must go up to make the value go up. In finance,
a long position in a security, such as a stock or a bond, or equivalently to be long in a security,
means the holder of the position owns the security and will profit if the price of the security
goes up.
• You are short in something if that something must go down to increase the value. In contrast,
a short position in a futures contract or similar derivative means that the holder of the
position will profit if the price of the futures contract or derivative goes down.
e.g. A European investor buys American Government bonds (in $).
• You are short in the American interest rates
• You are long in the dollar
Forward: seller and buyer have an obligation
Option: only seller has obligation
You can buy a call or sell a call, you can buy a put and sell a put
If you write options → you sell options
SELL = WRITE
Options
Call Put
buy sell
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Gedownload door Stefanie Deleu (stefaniedeleu46@hotmail.com)
, lOMoARcPSD|837380
To buy a call
Buy call = right (not the obligation) to buy an underlying asset during a period at a price fixed today
and that price fixed today is the exercise price.
• The right (NOT obligation)
• To buy something (=underlying asset)
• During a certain period (=time to maturity)
• At a price fixed today (=exercise price)
Time line:
T0: A=8 and you buy call A and the exercise price is 10 → you have the right to buy A for 10. If the
price of A between T0 and T1 is not going up to 10, you’re not buying. If you can buy it for 10, you are
going to exercise and the you have 10. If you have an instrument and you can avoid a minus → at T0,
you pay option premium → if you don’t exercise the call → you lose the premium.
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Gedownload door Stefanie Deleu (stefaniedeleu46@hotmail.com)
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