Economics 434 Financial Markets Professor Burton University of Virginia Fall 2015 December 1, 2015.

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Economics 434 Financial Markets Professor Burton University of Virginia Fall 2015 December 1, 2015

The Derivatives Market Exchange Traded Derivatives – Options – Futures Over the Counter Derivatives (not traded on exchanges) – Forwards – Swaps (including CDS, credit default swaps) December 1, 2015

Imagine XYZ stock currently trading at $ 40 per share What would be an example of a “call” option? A call option – Will be for 100 shares – Must have an expiration (maturity) date – Must have an “exercise” or “strike”price A “Jan 45” call gives its owner the right to buy 100 shares of XYZ for $ 4,500 at any time between now and the end of January December 1, 2015

Value Just Before Expiration December 1, Current Stock Price Value of Option 10

Value Long Before Expiration December 1, Current Stock Price Value of Option

Futures Contract What would a gold future look like, assume current (spot) price of Gold is 1100? It would provide a date and a quantity of Gold, lets assume 10 troy ounces (which would cost $ 11,100 in the spot market) February 2016 Gold would “require” the owner to buy gold at what at whatever price they paid for the future (times 10) December 1, 2015

Example Suppose Jan 16 Gold is trading at 1120 Then, no matter where gold is trading at the end of January, the owner must pay $ 11,200 and will receive 10 troy ounces in physical gold Expiration date is called a delivery date in the futures market December 1, 2015