Derivatives Essentials Flashcards
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Terms in this set
- Forward A privately negotiated contract to buy or sell an asset at a fixed price on a future date.
- Futures A standardized, exchange-traded forward contract that is marked to market daily through a clearinghouse.
- Option A contract giving the buyer the right, but not the obligation, to buy (call) or sell (put) an asset at a fixed price by a fixed date.
- Swap A contract to exchange a series of cash flows between two parties over time — most commonly fixed-for-floating interest payments.
- Strike The fixed price at which an option's underlying asset can be bought (call) or sold (put).
- Premium The upfront price the option buyer pays the seller for the rights conveyed by the contract.
- Hedge A derivative position taken to offset the risk of an existing exposure.
- Notional The reference amount used to calculate a derivative's cash flows, which is not itself exchanged.
- Margin Collateral posted to a clearinghouse or broker to ensure performance on a derivative position.
- Expiration The date on which a derivative contract terminates and final settlement occurs.