Derivatives

Exchange traded Derivatives:

backed by clearinghouse

Forwards and Swaps: -> custom instruments (traded / created OTC; largely unregulated)
Contracts are with counterparty (default risk)
Contingent claims -> options
Futures -> forward contract that is standardized and exchange traded;
-

Regulated; backed by clearinghouse; daily settlement

SWAP series of forward contracts

Forwards -> bilateral contract; obligates one party to buy and the other to sell @ specified price & date
Zero sum game; Long party agrees to buy; short party to sell (Price : long wins; $ : short wins)
Equity forward Contracts:
FRA -> forward rate agreements;
Quoted ex: a 60 day FRA on the 90 LIBOR means settlement or expiration is 60 days from now and the
payment at settlement is based on 90 day LIBOR 60 days from now. Quoted as 2 X 5 for (2 months until
expiration and months until end of interest paid period).
Notational principle:

(floating forward) (days / 360)

1 + (floating) (days / 360)

Yo needle dick, basically what Im saying is -> once you get the notational principle of the gain/loss from
the actual position, you then need to discount that amount back to the PRESENT VALUE using real
present value dates (since the payment transfer wouldnt actually occur until x days after.

Futures Priced to have zero value @ time of entry (like forwards)

Trade on exchanges; highly standardized; single clearinghouse is the counterparty; govt regulation.
Purchaser = long;

Seller = short

Both buyer and seller post margin (no interest, no loan!); Margin settled daily

Maintenance Margin -> if the initial margin requirement falls below the maintenance margin, the margin
account must be brought back up to the INITIAL Margin.
Variation Margin -> funds deposited to bring the balance back to initial margin amount.
Limit Move -> limit up; limit down; locked limit
Marking to market -> adjusting the margin balance each day based on the new settlement price.

How to terminate:
Delivery; enter reverse / offsetting contracts; cash settlement; exchange for physicals (off the floor)

Treasury Bills futures contracts: 1 million face value 90 day ; quotes @ 100 discount each tick (bp)
represents $25 for some fucked up reason (like they just through this in to mess us up)
Eurodollar Futures: 90-day LIBOR -> add on yield, however quoted as discount too!
Treasury Bond Futures: $100,000 quoted as % and as 1/32nds
Stock Index Futures:

multiplier of 250

Currency Futures:

Options:
Long Call (owner); Short Call (writer); Long Put (owner); Short Put (writer)
American Options -> can be exercised anytime until expiration
European Options -> can only be exercised on expiration date.
Moneyness.
LEAPS -> Long-term Equity Anticipatory Securities
Financial Options; Futures Options; Commodity Options;
Caps; Floors; Collars; (pg 197-198)
Interest Rate Options -> long a call and short a put = long an FRA

Option Value = intrinsic value + time value

Min = 0: Max = ct st; ; Ct St ; pt X; Pt x / (1+RFR)(T t)

Put / Call Parity:

S + P = C + X / (1 + RFR)T

SWAPS
Plain Vanilla -> fixed for floating (quoted in LIBOR)
Each payment based on previous period #s

Covered Call:
Buy a share & Sell a call on it; Selling upside potential in exchange for income on sale of the call
Protective Put:
Buy a share and a put; purchase downside protection (like insurance)
Price of a stock going down?

Buy puts of sell calls

Price going up?

Buy Calls or Sell Puts

Put another way -> Put buyer belives stock is over priced and is going down; call buyer believes price is
going up

Alternative Investments
Mutual Funds:
Open End Funds -> redeem shares @ closing value of trading day
Closed End Funds -> trade in secondary markets
Open end funds -> front end load; back end load; no load;

Real Estate Valuation Methods:

Cost method; Sales Comparison Method; Income Method; discounted after tax CF method
NOI -> depreciation and financing NOT INCLUDED!
Commodities:
Contango -> price in future is higher than present price
Backwardation -> price in future is lower than present
Roll yield -> rolling over position
-ive if contango; +ive if backwardation
If you must post collateral, you could earn a collateral yield (say if your collateral was T-Bills or
something).