The nature of derivatives a derivative is an instrument whose value depends on the values of other more basic underlying variables Options, Futures, and Other Derivatives, 5th edition C 2002 by John C. Hull

Consumption vs Investment Assets Investment assets are assets held by significant numbers of people purely for investment purposes (Examples: gold, silver) Consumption assets are assets held primarily for consumption(Examples: copper, oil)

Types of Rates Treasury rates LIBOR rates Repo rates Options, Futures, and Other Derivatives, 5th edition@ 2002 by John C. Hull

Types of options A call is an option to buy A put is an option to sell A European option can be exercised only at the end of its life An American option can be exercised at any time

Three Alternative strategies Take a position in the option and the underlying Take a position in 2 or more options of the same type(a spread Combination: Take a position in a mixture of calls puts(A combination)

Categorization of Stochastic Processes Discrete time; discrete variable Discrete time; continuous variable Continuous time; discrete variable Continuous time; continuous variable Options, Futures, and Other Derivatives,5 th edition2002 by John.hull

European Options on Stocks 13.2 Providing a dividend yield We get the same probability distribution for the stock price at time T in each of the following cases 1. The stock starts at price so and provides a dividend yield =q 2. The stock starts at price Soe q l and provides no income

Put-call parity p +spe-ql=c+Xer holds regardless of the assumptions made about the stock price distribution It follows that

Standard approach to Estimating Volatility Define on as the volatility per day between day n-1 and day n, as estimated at end of day Define S: as the value of market variable at end of day i

Binary options Nonstandard American Lookback options options Shout options Forward start options Asian options Compound options Options to exchange Chooser options one asset for another Barrier options Options involving