CFA-Derivative

• A forward commitment is an obligation to buy or sell an asset or make a payment in the future. Foward contracts, and swaps are all forward commitments.

• A contingent claim is an asset that has a future payoff only if some future event takes place. Options and credit derivativesare contingent claims.

• Option: an option contract gives its owner the right, but not the obligation, to either buy or sell an underlying asset at a given prive(the exercise price or strike price)

  • The seller of an option is also called the option writer
  • American options may be exercised at any time up to and including the contract’s expiration date
  • European options can be exercised only on the contract’s expiration date

• A swap is an agreement to buy or sell an underlying asset periodically over the life of the swap contract. It is equivalent to a series of forward contracts

• Arbitrage can be expected to force the prices of two securities or portfolios of securites to be equal if they have the same future cash flows regardless of future events