Tiêu đề Lecture Notes - Der.pdf ✅

LM01 Derivative Instrument and Derivative Market Features 2024 Level I Notes © IFT. All rights reserved 2 1. Introduction Cash markets refers to markets in which financial assets like equities, fixed income securities, currencies and commodities are exchanged at current prices. Cash markets are also known as spot markets because the transactions are settled on the spot. In contrast, derivatives involve the future exchange of cash flows whose value is derived from or based on an underlying value. This learning module covers what is a derivative, the different types of derivatives, and the basic features of a derivatives market. 2. Derivative Features Definition and Features of a Derivative A derivative is a financial instrument that derives its value from the performance of an underlying asset. In simple terms, a derivative is a legal contract between a buyer and a seller, entered into today, regarding a transaction that will be fulfilled at a specified time in the future. This legal contract is based on an underlying asset. For example, exhibit 1 from the curriculum shows a ‘forward contract’ which is a type of derivative. In this example: • AMY Investments agrees today (t = 0) to deliver 1,000 shares of Airbus (AIR) at a fixed price of €30 per share on a future date (t = T), which in the example is six months.
LM01 Derivative Instrument and Derivative Market Features 2024 Level I Notes © IFT. All rights reserved 3 • The forward contract allows AMY to transfer the price risk of the underlying to the counterparty. • If the spot price of AIR is €25 after six months, AMY will still receive €30,000 from the counterparty in exchange for 1,000 AIR shares (which are now worth just €25,000). Alternatively, AMY could simply settle with the intermediary the €5,000 difference in cash. A derivative contract is a legal agreement between counterparties that defines the rights of each party involved. There are two parties participating in the contract: a buyer and a seller. • Long: Buyer of the derivative is said to be long on the position. He has the right to buy the underlying according to the conditions mentioned in the contract. • Short: Seller of the derivative is said to be short. Remember “s” is for short and seller. A stand-alone derivative is a distinct derivative contract such as a derivative on a stock or bond. In contrast, an embedded derivative is a derivative within an underlying, such as a callable, puttable, or convertible bond. Exhibit 2 from the curriculum provides a sample forward contract term sheet for the AMY example.