Level I –Derivatives
Derivative Markets and Instruments
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Contents and Introduction
1. Introduction
2. Derivatives: Definitions and Uses
3. The Structure of Derivatives Market
4. Types of Derivatives
5. The Purposes and Benefits of Derivatives
6. Criticism and Misuses of Derivatives
7. Elementary Principles of Derivative Pricing
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2. Derivatives: Definitions and Uses
Derivative: a financial instrument which derives its value from an
underlying (asset)
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•Underlying
•Legal contract
•Long and short
Risk management is the process by which an organization or individual defines
the level of risk it wishes to take, measures the level of risk it is taking, and
adjusts the latter to equal the former.
Example 1
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3. The Structure of Derivative Markets
Exchange-Traded Derivatives Markets Over-the-Counter Derivatives Markets
•Informal network of market
participants
•Dealer market
•Less liquid
•More transparent
•Customized
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•Clearing and settlement process
•All contract terms standardized, except
for price
•More liquid
•More transparent
•Credit guarantee
▪Margin or performance bonds
Market makers make money through the bid-ask spread
Example 2
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Example 2 (Cont…)
