Swaps This is an agreement between two parties, usually institutions, to exchange cash flows according to a predefined calculation at some specified periodic intervals in the future. The calculation may be based on the future value of interest rates, foreign exchange rates or some other
Futures Contracts These are contracts where the buyer/ holder of the contract agrees to purchase while the seller / writer of the contract agrees to deliver a specified asset at some future specified time (the exact delivery date is not specified only the delivery month)
These are contracts where the buyer/ holder of the contract agrees to purchase while the seller / writer of the contract agrees to deliver a specified asset at some future specified time (the maturity date) for an exercise/ delivery price that is fixed today. Both
Exotic Options Exotic Options can be path dependent or correlation based. Path-dependent options are dependent on the route prices of the underlying asset take through the life of the option (not just the terminal price or rate at maturity). Bermuda option This is a blend
Interest Rate Options The payoffs under these options are dependent of the level of interest rates. Bond Options This is an option to buy/sell a specified bond for a predetermined price within a specified period of time. Most bond options tend to be European. Embedded
Stock Options The contract gives the holder the right to buy or sell a given number of shares at the exercise price. Foreign Currency Options These contracts give the holder the right to buy or sell a foreign currency denominated amount. They are usually traded
Greeks Option Price Sensitivities (OPS) or Greeks measure how option prices change with respect to a specific pricing factor. The sensitivities are called Greeks because the five symbols used to represent the sensitivities are in Greek notation Greeks Factor Comments Delta Change in option price
Option Price The price of the option depends on the following: Asset Price: For an American or European call option the higher the asset price the higher will be the option price all other things unchanged. On the other hand, for a put option the
There are three major categories of derivative instruments- options, forwards and futures, and swaps. A quick comparison of their characteristics is given in the table below: Option Forward Future Swap Downside Protection ü ü ü ü Upside Potential ü Initial Cost ü Credit Risk ü
A second look at derivative contracts A typical derivative deal comes with a long list of qualifications that are presented and shared with customers in the form of a term sheet. A term sheet is generally executed as a legally binding document with a number