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Level 66

Role of Derivative Assets

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Derivative Assets
their value derives from some other asset
Plain Vanilla
no-frills inomplicated derivative contract
Chicago Board of Trade
first organized derivatives exchange in the US founded in 1848
Price Risk
the risk of not knowing the ultimate proceeds
Risk Management
The process of making and implementing decisions that will minimize the adverse effects of accidental losses on an organization
Risk Transfer
provides a means for risk to be transferred from one person to another to some other market participant who for a price is willing to bear it
financial leverage
A bank's equity multiplier measures the bank's"
Income Generation
generating addtional income from their investment portofolio
Call Option
buying shares
Underlying Asset
the asset you have the right to buy
Strick Price
the price at which you have the right to buy
Expiration Date
the last day the option is valid
measure of trading activity and it indicates how many option contracts changed hands over some period of time
Open Interest
a measure of how many option contracts exist
sell it
3 Choices for Owenr's Options
Put Option
selling shares
Opening Transaction
tthe first trade someone makes in a particular option
Writing the Option
when an option is sold as an opening transaction
for a given company, all options of the same type with the same expiration and striking price are identical
Intrinsic value
economic or fair value of an asset; the present value of the asset's expected future cash flows.
Time Value
A dollar today is not the same value as a dollar two years from now
Out of the Money
have no intrinsic value
In the Money
have intrinsic value
At the money
option's strike price is exactly equal to the price of the underlying security
American Option
the right can be excerised anytime prior to the expiration of the option
European Option
can be excerised only at expiration
Uncovered/Naked Call
a call written without owned shares
Futures Contract
an arrangement for delivery of an item at some date in the future, where the delivery details are determined when the contract is created
someone engaged in business activity with an unacceptable level of price risk and uses futures to reduce risk
assumes risk in the hope of making a profit
provide liquidity for the marketplace
Stock Index Futures
a promise to buy or sell the standardized units of a specific index at a fixed price at a predertemined future date
Short Term Contracts
Eurodollars and US Treasury Bills features contacts call for the delivery of $1 million par value of 3 month instruments
Intermediate Contracts
US Treasury Notes have a life of less than 10 years at the time they are initially offered
Long Term Contracts
US Treasury Bonds maybe callable after 15 years after issuance