Derivative Securities - Summary - Tilburg university - MSc Finance
32 views 4 purchases
Course
(325017M6)
Institution
Tilburg University (UVT)
Book
Options, Futures, and Other Derivatives, Global Edition
Instagram: ECOsummaries DM me for 20% discount!
Summary for the course 'Advanced Corporate Finance'. This summary was written in order to study for the final. Everything you need to know is available in this summary.
Instagram: ECOsummaries DM me for 20% discount!
Solution Manual for Options, Futures, and Other Derivatives Global Edition, 11th Edition By John Hull, All 36 Chapters Covered, ISBN: 9781292410654 & Verified Latest Edition
Financial Risk Management - All exercises/ problem sets solved - 18/20!!!
All-in-one Summary, notes and lecture commentary on Derivative Instruments
,Lecture 1 – Forward contracts
Introduction:
Derivative: instrument whose value depends on the value of other, more basic, underlying
variables.
Options: the right to buy/sell an asset at a fixed price today (call/put)
Futures: agreement to buy or sell a specific commodity asset or security at a set future date
for a set price (traded publicly, standardized terms, prices settled daily until end of contract)
Forwards: same as futures but traded privately, customizable agreement, and is settled at
the end of the agreement.
Interest rate swaps: swap a variable for a fixed rate to protect against interest rate risk
Credit default swaps (CDS): insurance against default of a firm
Mortgage-backed securities (MBS): collection of mortgages divided in tranches based on
risk level with different payoff rates for each tranch.
Collateralized debt obligations (CDO): same tranch structure as MBS, but can be more debt
assets than mortgages, like bonds and loans.
Goals: reduce risk (hedge), speculate, arbitrage
Risks: asymmetric information (who are you trading with?), liquidity risks
Forward contract:
Forward contract: private (over the counter) agreement between two parties to buy/sell an
asset at a certain time in the future for a pre-determined price (K), determined at t=0.
- No money changes hands at t=0 (except with collateral fee)
- Settled at maturity
Spot contract: agreement to buy/sell immediately → different from forward contract.
Collateral fee: fee to mitigate credit risk as a % of the forward price (jar)
Replicating portfolio – forward contract:
Forward long:
X axis: share price
Y axis: payoff at T
P > K → profit
P < K → loss
Replicating intuition: you borrow ‘K’ that needs to be repaid at t=1, and use it to invest in the
long position. When P>K, you make a profit. When the price doesn’t move (P=K), you
breakeven as this is the amount you borrowed and can repay ‘K’ immediately. When P<K,
you make a loss of maximum ‘K’ as this is what you need to repay at t=1.
3
, Forward short:
Replicating intuition: you borrow a stock and immediately sell it, this money you lend out to
the other party. At t=1, you get back ‘K’ and have to pay ‘P’ to the other party. When P<K,
you make a profit. When P=K, you breakeven as you have to buy the stock for ‘K’ and use
your lend out money. When P>K, you make a loss as you need to pay more on top of ‘K’
which you bought the stock for originally.
Mirroring intuition: there are 2 parties in the contract, so each party should have the mirror
image of the other party.
Hedging: use forward contracts to hedge against price risk by locking in a price for the
future.
Example: airline uses oil forward to hedge fuel price risk for travel peaks (Christmas)
Idea: when oil price rises, you
make a loss, but with a forward
contract you gain when oil price
rises.
→ Net payoff equal
Net payoff: remains equal for the whole duration and protects for situation where the
liability would be going below the net payoff.
Pricing futures and forwards – investment assets:
Assumptions: no transactions costs, no taxes, borrowing/lending at Rf, risk averse investors.
Notation:
- St = spot price at t
- FtT = forward price at time t for delivery at time T
- T – t = time until delivery date
- r = risk-free rate for maturity T
Theory: forward price at t with maturity date T with an underlying asset that pays no
dividends is the following formula.
→ For t=0 we get
4
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller ecosummaries. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $7.15. You're not tied to anything after your purchase.
