Chapter 2 An Introductionto Forwards and OptionsSsssssFINA0301 DerivativesFaculty of Business and EconomicsUniversity of Hong Kong
FINA0301 Derivatives Faculty of Business and Economics University of Hong Kong Chapter 2 An Introduction to Forwards and Options
Chapter OutlineBasic derivatives contractsForward contracts·Call optionsPut optionsTypesofpositionsLong / Short positionGraphical representationPayoff/Profit diagrams
Chapter Outline Basic derivatives contracts • Forward contracts • Call options • Put options Types of positions • Long / Short position Graphical representation • Payoff / Profit diagrams
Forward ContractsD Forward contract: a binding agreement(obligation) to buylsell an underlying asset inthe future, at a price set todayExpirationTodaydate
Today Expiration date Forward Contracts Forward contract: a binding agreement (obligation) to buy/sell an underlying asset in the future, at a price set today
Forward Contracts A forward contract specifies The features and quantity of the asset to bedelivered The delivery logistics, such as time, date, andplaceThe price the buyer will pay at the time of delivery Futures contracts are the same as forwards inprinciple except for some institutional andpricing differences
Forward Contracts A forward contract specifies • The features and quantity of the asset to be delivered • The delivery logistics, such as time, date, and place • The price the buyer will pay at the time of delivery Futures contracts are the same as forwards in principle except for some institutional and pricing differences
Reading Price QuotesLow of the daySettlementpriceIndex futuresHigh of the dayDaily changeThe open priceOpenContractOpeninterestLowSettleChgOpenHighhi lointerestExpiration monthIndex FuturesDJIndustrialAverage(CBT)-$1oxindex132551837,703Sept1327513380132501613346218Dec134271346513346MiniDJIndustrialAverage(CBT)-$5x index1325518Sept132751338313250101,8371334616Dec134001348013353246S&P500Index(CME)-$250xindex4.10Sept1453.801455.10577,5611454.401472.50Dec1468.001466.904.1060,4871481.501483.00MiniS&P500(CME)-$50xindex1455.004.00Sept1454.501472.501453.502.083.824Dec1468.501484.001466.001467.004.2529,904Nasdaq100(CME)-$100xindex13.50Sept1934.00.1957.001932.251942.5068,640MiniNasdaq100(cME)-$20 xindexSept1942.513.5429,3541933.31957.31932.0Dec1964.31965.313.54831968.31979.0Russell1000(NYB0T)-$500xindex791.252.50Sept798.40798.50798.407,367U.S.DollarIndex(NYBoT)-$1,000xindex.38Sept81.0480.6580.9734,23480.63.38Dec80.4280.8180.5280.773,300Source:Wall Street Journal,August14,2007,p.C-6
Reading Price Quotes Index futures Expiration month The open price High of the day Low of the day Settlement price Daily change Open interest