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Lesson 9 1023

futures and options

TermDefinition
Currency options Option contracts whose value is based on the value of an underlying currency, such as the Canadian dollar.
Equity-derivative securities Securities that derive their value in whole or in part by having a claim on the underlying common stock.
Exercise (strike) price The per-share price at which the common stock may be purchased from (in the case of a call) or sold to (in the case of a put) a writer.
Expiration date The date on which an option expires.
Financial futures Futures contracts on financial assets, such as equity indexes, fixed-income securities, and currencies
Future contract Agreement providing for the future exchange of a particular asset between buyer and seller at a specified date for a specified amount.
Futures margin The good faith (earnest money) deposit made by the buyer or seller to ensure the completion of a contract.
Hedge A strategy using derivatives to offset or reduce the risk resulting from exposure to an underlying asset.
Hedge ratio The ratio of options written to shares of stock held long in a riskless portfolio.
Index arbitrage Exploitation of price differences between stock-index futures and the index of stocks underlying the futures contract.
Interest rate options Option contracts on fixed-income securities such as Government of Canada bonds.
Intrinsic value The estimated or true value of a security as determined by an investor after examining a firm's underlying variables.
Long hedge A transaction where the asset is currently not held but futures are purchased to lock in current prices.
Long position An agreement to purchase an asset at a specified future date at a specified price.
Long-term options Options on individual stocks with maturities greater than one year.
Marked to the market All profits and losses on a contract are credited and debited to each investor's account every trading day.
Offset Liquidation of a futures position by an offsetting transaction—buyers sell their positions and sellers buy their positions prior to the settlement of the contract (delivery).
Option premium The price paid by the option buyer to the seller (writer) of the option.
Options Claims that give the holder the right, but not the obligation, to buy or sell a stated number of shares of stock within a specified period at a specified price.
Portfolio insurance An asset management technique designed to provide a portfolio with a lower limit on value while permitting it to benefit from rising security prices.
Protective put A strategy involving the purchase of a put option as a supplement to a long position in an underlying asset.
Put An option that gives the holder the right, but not the obligation, to sell a specified number of shares of stock at a stated price within a specified period.
Put-call parity The formal relationship between a European call and a put on the same item that must hold if no arbitrage is to occur.
Right A corporate-created option to purchase a stated number of common shares at a specified price within a specified time (typically a few months).
Short hedge A transaction involving the sale of futures (a short position) while holding the asset (a long position).
Short position An agreement to sell an asset at a specified future date at a specified price.
Spread The purchase and sale of an equivalent option varying in only one respect.
Stock-index options Option contracts on a stock market index such as the S&P/TSE 60 Index.
Straddle A combination of a put and a call on the same stock with the same exercise date and exercise price.
Swap A cash settled forward agreement with a series of predetermined payments.
Time value The difference between the intrinsic value of an option and its market price.
Warrants An option created by a corporation to purchase a stated number of common shares at a specified price within a specified time (often several years).
Created by: annajone
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