financing
Classified in Economy
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● Long hedge: Involves the purchase of a futures contract to guard against a price increase
● Short hedge: Involves the sale of a futures contract to protect against a price decline in
commodities or financial securities
● Perfect hedge: Occurs when gain/loss on hedge transaction exactly offsets loss/gain on
unhedged position
Speculation: Buyingafuturescontract(today)isoftenreferredtoas“goinglong,”orestablishingalong position
Recall: Each futures contract has an expiration date
▪ A new futures price is established every day before expiration.
▪ If this new price is higher than the previous day’s price, the holder of a long futures contract
position profits from this futures price increase
▪ If this new price is lower than the previous day’s price, the holder of a long futures contract position loses from this futures price decrease.
● Short hedge: Involves the sale of a futures contract to protect against a price decline in
commodities or financial securities
● Perfect hedge: Occurs when gain/loss on hedge transaction exactly offsets loss/gain on
unhedged position
Speculation: Buyingafuturescontract(today)isoftenreferredtoas“goinglong,”orestablishingalong position
Recall: Each futures contract has an expiration date
▪ A new futures price is established every day before expiration.
▪ If this new price is higher than the previous day’s price, the holder of a long futures contract
position profits from this futures price increase
▪ If this new price is lower than the previous day’s price, the holder of a long futures contract position loses from this futures price decrease.
3. OPTION
Definition: An option is the right to either buy or sell something at a set price, within a set period of time. You can exercise an option if you wish, but you do not have to do so.The right to buy is a call option. The right to sell is a put option. Goals:
▪ Understand option terminology
▪ Be able to determine option payoffs and profits
▪ Understand the major determinants of option prices
Terminology
● Exercising the Option: The act of buying or selling the underlying asset
● Strike/Exercise Price (Precio de ejercicio - E): Fixed price in the option contract at which the
holder can buy or sell the underlying asset
● Expiry/Expiration Date (Vencimiento):The maturity date of the option
● Writer/grantor (Vendedor): Institution that sells the option Υ Holder (Comprador):
Institution/investor that’s buys the option.
Definition: An option is the right to either buy or sell something at a set price, within a set period of time. You can exercise an option if you wish, but you do not have to do so.The right to buy is a call option. The right to sell is a put option. Goals:
▪ Understand option terminology
▪ Be able to determine option payoffs and profits
▪ Understand the major determinants of option prices
Terminology
● Exercising the Option: The act of buying or selling the underlying asset
● Strike/Exercise Price (Precio de ejercicio - E): Fixed price in the option contract at which the
holder can buy or sell the underlying asset
● Expiry/Expiration Date (Vencimiento):The maturity date of the option
● Writer/grantor (Vendedor): Institution that sells the option Υ Holder (Comprador):
Institution/investor that’s buys the option.