Underlying Security (基础证券) : a stock or bond on which derivative instruments are based. It is the primary component of how the derivative gets its value.
- Can be any asset, index, financial instrument, or even another derivative.
- The relationship between the underlying and its derivatives is not linear, in general.
Forward Contracts vs. Futures Contracts both involve the agreement between two parties to buy and sell an asset at a specified price by a certain date.
- Forward Contracts: made over the counter (OTC) and settles just once, at the end of the contract.
- Futures Contracts: standardized contracts that trade on stock exchanges, where prices are settled on a daily basis until the end of the contract.
Swap the exchange of future cash flows between two partners according to agreed prior criteria that depend on the values of certain underlying assets. Swaps can thus be thought of as portfolios of forward contracts, and the initial value as well as the final value of the swap is zero.
Options Contract : an agreement between two parties to facilitate a potential transaction on an underlying security at a preset price, referred to as the strike price, prior to or on the expiration date.
- American options can be exercised any time before the expiration date of the option.
- European options can only be exercised on the expiration date or the exercise date.
- In general, call options can be purchased as a leveraged bet on the appreciation of a stock or index, while put options are purchased to profit from price declines.
- If the seller holds the shares to be sold, the position is referred to as a covered call.
- long position in an asset, if he owns the asset.
- short position in an asset, if he has sold the asset.
Example : Company ABC’s shares trade at 60, and a call writer is looking to sell calls at 65 with a one-month expiration. (1) If the share price stays below 65 and the options expire, the call writer keeps the shares and can collect another premium by writing calls again. (2) If, however, the share price appreciates to a price above 65, referred to as being in-the-money (ITM), the buyer calls the shares from the seller, purchasing them at $65. The call-buyer can also sell the options if purchasing the shares is not the desired outcome.
Option Writer : the seller of an option who opens a position to collect a premium payment from the buyer.
Strike Price : price in the options contracts.
- In-the-money (ITM) options have intrinsic value since their strike prices are lower than the market price for a call, or higher than the market price for a put.
- At-the-money (ATM) options have a strike price that is equal to the current market price of the underlying.
Call Option : financial contracts that give the buyer the right—but not the obligation—to buy a stock, bond, commodity, or other asset or instrument at a specified price within a specific period.
- The specified price is called the strike price, and the specified time during which the sale can be made is its expiration (expiry) or time to maturity.
- You pay a fee to purchase a call option, called the premium; If, at expiration, the underlying asset is below the strike price, the call buyer loses the premium paid. this per-share charge is the maximum you can lose on a call option.
Put Option : a contract giving the option buyer the right, but not the obligation, to sell a specified amount of an underlying security at a predetermined price within a specified time frame.
- This predetermined price at which the buyer of the put option can sell the underlying security is called the strike price.
- A put option becomes more valuable as the price of the underlying stock or security decreases.
To Hedge (对冲) is to take an offsetting position in an asset or investment that reduces the price risk of an existing position. A hedge is therefore a trade that is made with the purpose of reducing the risk of adverse price movements in another asset. Normally, a hedge consists of taking the opposite position in a related security or in a derivative security based on the asset to be hedged.
Speculation (投机), or speculative trading, refers to the act of conducting a financial transaction that has substantial risk of losing value but also holds the expectation of a significant gain or other major value. With speculation, the risk of loss is more than offset by the possibility of a substantial gain or other recompense.
Arbitrage (套利) is the simultaneous purchase and sale of the same or similar asset in different markets in order to profit from market inefficiencies.