Chapter 1 - Introduction. The main contents of the chapter consist of the following: Introduction, types of derivatives, participants in the derivatives world, uses of derivatives, effective study of derivatives. | © 2004 South-Western Publishing Derivatives: An Introduction by Robert A. Strong University of Maine Prepared by Oliver Schnusenberg The University of North Florida © 2004 South-Western Publishing Chapter 1 Introduction Outline Introduction Types of derivatives Participants in the derivatives world Uses of derivatives Effective study of derivatives Introduction There is no universally satisfactory answer to the question of what a derivative is Often when a market participant suffers a large newsworthy loss, the term “derivatives” is used almost as if it were an explanation “anything that results in a large loss” “dreaded D word” “beef derivative” Introduction (cont’d) Futures and options markets are very useful, perhaps even essential, parts of the financial system Futures and options markets have a long history of being misunderstood Introduction (cont’d) “What many critics of equity derivatives fail to realize is that the markets for these instruments have become so large not because of slick sales campaigns, but because they are providing economic value to their users” Alan Greenspan, 1988 Types of Derivatives Categories of derivatives Options Futures contracts Swaps Product characteristics Categories of Derivatives Futures Listed, OTC futures Forward contracts Options Calls Puts Swaps Interest rate swap Foreign currency swap Derivatives Options An option is the right to either buy or sell something at a set price, within a set period of time The right to buy is a call option The right to sell is a put option You can exercise an option if you wish, but you do not have to do so Futures Contracts Futures contracts involve a promise to exchange a product for cash by a set delivery date Futures contracts deal with transactions that will be made in the future Futures Contracts (cont’d) Futures contracts are different from options in that: The buyer of an option can abandon the option if he or she wishes The buyer of | © 2004 South-Western Publishing Derivatives: An Introduction by Robert A. Strong University of Maine Prepared by Oliver Schnusenberg The University of North Florida © 2004 South-Western Publishing Chapter 1 Introduction Outline Introduction Types of derivatives Participants in the derivatives world Uses of derivatives Effective study of derivatives Introduction There is no universally satisfactory answer to the question of what a derivative is Often when a market participant suffers a large newsworthy loss, the term “derivatives” is used almost as if it were an explanation “anything that results in a large loss” “dreaded D word” “beef derivative” Introduction (cont’d) Futures and options markets are very useful, perhaps even essential, parts of the financial system Futures and options markets have a long history of being misunderstood Introduction (cont’d) “What many critics of equity derivatives fail to realize is that the markets for these instruments
