Financial Analysis. Lesson 39. Derivatives Market and Risk Management

Financial Analysis. Lesson 39. Derivatives Market and Risk Management

1. Derivatives market facilitates trading of financial instruments based on underlying assets.

2. Options give the right, not obligation, to buy or sell assets.

3. Call option allows buying an asset at a specified price.

4. Put option provides the right to sell an asset at a set price.

5. Futures contract obligates parties to transact an asset at future date and price.

6. Forward contract is a customizable agreement to buy or sell assets at a future date.

7. Swap exchanges cash flows or liabilities between two parties, often in different currencies.

8. Credit default swap (CDS) is a derivative that provides protection against credit defaults.

9. Interest rate swap exchanges fixed-rate payments for floating-rate payments or vice versa.

10. Currency swap involves exchanging principal and interest in different currencies.

11. Derivative exposure is the potential loss from holding derivative instruments.

12. Hedging uses derivatives to reduce exposure to price fluctuations.

13. Speculation involves taking on risk for potential profit through derivatives.

14. Arbitrage exploits price discrepancies in different markets for profit.

15. Leverage amplifies exposure by using borrowed funds or derivative contracts.

16. Margin requirement is the minimum collateral needed to trade on margin.

17. Notional value is the total value of an underlying asset in a derivative.

18. Strike price is the specified price in an options contract.

19. Expiration date is when a derivative contract becomes void if unexercised.

20. Delta measures an option’s sensitivity to changes in the asset price.

21. Gamma indicates the rate of change in an option's delta.

22. Theta measures an option’s time decay, reducing its value as expiration approaches.

23. Vega reflects the sensitivity of an option’s price to volatility changes.

24. Rho measures an option’s sensitivity to changes in interest rates.

25. Implied volatility estimates future price movement based on current options pricing.

26. Exotic options are complex options with non-standard features or payoffs.

27. Barrier option activates or deactivates once the asset hits a price level.

28. Covered call involves selling a call option on an asset already owned.

29. Protective put uses put options to limit downside risk on owned assets.

30. Dynamic hedging adjusts positions frequently to maintain desired risk exposure.

---

Technical Examples:

1. Credit default swaps (CDS) help protect bondholders against credit risks.

2. Delta is crucial for assessing the price sensitivity of options.

3. Barrier options provide flexibility by activating only when certain conditions are met.