Dr. Hussein Atta Ghoneim (Derivatives –Unit 1)
INTRODUCTION
UNIT 1
By Dr. Hussein Atta Ghoneim
Dr. Hussein Atta Ghoneim (Derivatives –Unit 1)
•First and foremost, a derivatives instrument is a contract, or agreement,
between two contract counterparties.
•Unlike many market transactions where ownership of an underlying asset is
immediately transferred from the seller to the buyer, a derivatives
transaction involves no actual transfer ownership of the underlying asset at
the time the contract is initiated. Instead, a derivative contract simply
represents a promise, or an agreement, to transfer ownership of the
underlying asset at a specific place, price, and time specified in the contract.
•There are several types of derivatives, including commodity derivatives and
financial derivatives.
•Five types of derivatives: forwards, futures, options, options on futures, and
swaps.
•We have now reached the stage where those who work in finance, and
many who work outside finance, need to understand how derivatives work,
how they are used, and how they are priced. Whether you love derivatives
or hate them, you cannot ignore them!
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Dr. Hussein Atta Ghoneim (Derivatives –Unit 1)
Forwards
•A forward contract is an agreement negotiated between two parties
for the delivery of a physical asset (e.g., oil or gold) at a certain time
in the future for a certain price.
•No actual transfer of ownership occurs in the underlying asset when
the contract is initiated.
•Instead, there is simply an agreement to transfer ownership of the
underlying asset at some future delivery date.
•Strong evidence suggests that Roman emperors entered into forward
contracts with their suppliers of Egyptian grain.
•Forward contracts on both foreign exchange and physical
commodities involve physical settlement at maturity.
•Many forward contracts, however, are cash-settled forward
contracts.
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Dr. Hussein Atta Ghoneim (Derivatives –Unit 1)
Futures
•A future contract is a type of forward contract with highly
standardized and precisely specified contract terms.
•As in all forward contracts, a futures contract calls for the exchange
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