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Derivatives Overview

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Interest Rate Swap

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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.

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At-the-Money Option

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An option where the strike price is equal to the current price of the underlying asset.

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Speculation

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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.

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Forward Contract

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A non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed upon today.

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Futures Contract

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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.

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Put Option

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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.

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Out-of-the-Money Option

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An option that, if exercised, would produce a negative cash flow. It has no intrinsic value, only time value.

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Open Interest

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The total number of outstanding derivative contracts, such as options or futures that have not been settled.

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Time Decay (Theta)

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A measure of the rate at which the option's price will decrease as the expiration date approaches, assuming other factors remain constant.

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Credit Default Swap (CDS)

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A financial derivative or contract that allows an investor to 'swap' or offset their credit risk with that of another investor.

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Hedge

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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.

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Swap

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A derivative contract through which two parties exchange financial instruments, such as interest rates, commodities, or foreign exchange.

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Call Option

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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.

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Option Premium

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The price that the buyer of an option pays to the seller for the rights conveyed by the option contract.

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Option

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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.

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Strike Price

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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.

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Implied Volatility

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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.

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Delta

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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.

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In-the-Money Option

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A situation in an options contract where the option would have intrinsic value if exercised immediately.

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Gamma

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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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