Derivatives - worksheet

• Derivatives exchange


  A market where derivatives contracts are traded
• CBOT


  • Established in 1848
  • Introduced the first futures contracts
• Speculating


  When a party has no interest in the underlying asset, their motive is to make money from price movements
• Hedging


  When a party has an interest in the underlying asset, they use derivatives to manage their risk
• OTC derivatives do not have standardised features
• Exchange traded options


  The premium is paid directly to the exchange
• In exchange traded futures contracts, only the price is negotiable - quality, quantity, date and location is set by the exchange
• Naked position


  When the seller of a future does not own the underlying asset
• Long position


  The position taken by the buyer of a future
• ICE Futures Europe is the major UK market for trading financial derivatives
• Holder of an option

  The buyer of a call or put option
• LIFFE trades individual equity options and soft commodities
• Put option


  The buyer has the right to sell the underlying asset at the exercise price, obliging the writer to take delivery and pay the exercise price
• Short futures


  The selling party's position in a futures contract
• Eurex derivatives exchange is based in Frankfurt
• LME Select


  The electronic trading system used on the London Metal Exchange
• Option premium


  Paid by the holder of the option to the exchange, which is then passed on to the writer
• ICE trades energy commodity contracts
• LME trades commodities except power
• Short call option


  The writer of a call option is obliged to deliver the underlying asset upon exercise
• The option premium is non-refundable
• OTC derivatives have terms negotiated directly between counterparties
• Both parties in a wheat futures contract are likely hedging
• Exercise price


  Relates to options
• Underlying


  The asset from which the derivative's price is determined
• Speculating on a range of assets and markets is an advantage of investing in derivatives
• Futures contracts do not have the feature of being categorised as call or put
• Call option


  The buyer has the right to buy the asset at the exercise price
• Option writer


  The seller of an option
• Equities are not a major form of derivative
• ICE Futures Europe trades derivatives on soft commodities as well as financial derivatives