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Derivatives Overview
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Interest Rate Swap
A financial derivative instrument in which two parties agree to exchange one stream of interest rate payments for another, based on a specified principal amount.
At-the-Money Option
An option where the strike price is equal to the current price of the underlying asset.
Speculation
Engaging in risky financial transactions in an attempt to profit from fluctuations in the market value of a tradable good such as a financial instrument, rather than attempting to profit from the underlying financial attributes embodied in the instrument such as dividends.
Forward Contract
A non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed upon today.
Futures Contract
A standardized legal agreement to buy or sell something at a predetermined price at a specified time in the future, between parties not known to each other.
Put Option
An options contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time.
Out-of-the-Money Option
An option that, if exercised, would produce a negative cash flow. It has no intrinsic value, only time value.
Open Interest
The total number of outstanding derivative contracts, such as options or futures that have not been settled.
Time Decay (Theta)
A measure of the rate at which the option's price will decrease as the expiration date approaches, assuming other factors remain constant.
Credit Default Swap (CDS)
A financial derivative or contract that allows an investor to 'swap' or offset their credit risk with that of another investor.
Hedge
An investment position intended to offset potential losses or gains that may be incurred by a companion investment, using derivative instruments like options and futures.
Swap
A derivative contract through which two parties exchange financial instruments, such as interest rates, commodities, or foreign exchange.
Call Option
An options contract that gives the owner the right, but not the obligation, to buy a specified amount of an underlying security at a specified price within a specified time period.
Option Premium
The price that the buyer of an option pays to the seller for the rights conveyed by the option contract.
Option
A contract that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a specified date.
Strike Price
The fixed price at which the owner of an option can purchase (in the case of a call) or sell (in the case of a put) the underlying security or commodity.
Implied Volatility
A metric that captures the market's view of the likelihood of changes in a given security's price. Higher implied volatility indicates a greater expected fluctuation.
Delta
A ratio that compares the change in the price of an underlying asset with the corresponding change in the price of a derivative or option.
In-the-Money Option
A situation in an options contract where the option would have intrinsic value if exercised immediately.
Gamma
A measure of the rate of change in an option's delta for a one-unit change in the price of the underlying asset.
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