With a swap, you exchange future cash flows with another investor (usually in the same currency – that’s also called a plain vanilla swap). For example, you could exchange interest rates. Let’s assume you feel that the interest rate will decrease while another investor wants to secure himself against rising interest rates. Therefore you might want a variable interest rate […]
If you buy a spot market instrument you have to bare the total cost of carry (financing costs) immediately at the point you buy it. On the other side, if you buy a future you can bare the financing costs at a later point. Therefore it seems reasonable that a future will cost more. (Money you have now is always […]
Bull spead: You expect underlying prices (eg. stock prices) to rise (slightly) Bear spead: You expect underlying prices (eg. stock prices) to fall (slightly).(black horizontal line is the price of the underlying)
Short Straddle: If you believe the market volatility will be low in the upcoming days/weeks a short straddle might be the right option strategy for you. You buy a short call as well as a short put. Probably the buyer of the call and put won’t exercise his options and you make a profit (2 x premium) Long Straddle: If […]
Short Call (You think the underlying will fall or stagnate in the future) You are obliged to sell an underlying at some point in the future if the option holder exercises his option. You think that the underlying price will fall or stagnate in the future. If the underlying falls the buyer won’t exercise his option and you stay with […]
Long Call (You imagine the underlyings price will rise strongly) You have the right to buy the underlying at a specified date (European futures) or timeframe (American futures) for a specified price. You expect the prices of the underlying to rise (Long). Your risk is limited: The maximum you can lose is the option premium. Example: You buy a Long […]
Long Future If you believe underlying prices will rise. Short future If you believe underlyings price will fall
Institutional clients Banks act as Market Makers (they act as dealers who provide binding buy and sell prices to the market) Other institutional clients Funds etc. often sell Calls on parts of their portfolios (if they want to lock in some profits). Furthermore, they use futures and options for risk management purposes. Retail investors Retail investors often use derivatives to […]
You could make a profit no matter in what direction the market moves You could invest with less capital then you would need on the spot market You could make a lot of profit (by using leverage) With a derivative you could protect yourself against price losses In case of options you can only exercise them if they generate you […]
There are 4 main things that influence the price of an option. First, the intrinsic value. This is the difference between the underlying value (eg. stock price) and strike price. Formula = Underlying price – Strike price. However the intrinsic value cant be negative (as the share price cant be negative). Therefore only the money option has an intrinsic value. […]