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Actuary /
DerivativeActuary.Derivative HistoryShow minor edits - Show changes to output Changed line 20 from:
**'''purchased call''' -- This is the position of the buyer of the asset. When the spot price at expiration is sufficiently higher than the strike price, the buyer gains, but only when the difference is more than the future value of the premium. The purchaser of the call option can have unlimited gain, but can only lose an amount up to the future value of the premium (because if the spot value at expiration is too low, the buyer can choose to do nothing). The payoff of a purchased call option is to:
**'''purchased call''' (long call) -- This is the position of the buyer of the asset. When the spot price at expiration is sufficiently higher than the strike price, the buyer gains, but only when the difference is more than the future value of the premium. The purchaser of the call option can have unlimited gain, but can only lose an amount up to the future value of the premium (because if the spot value at expiration is too low, the buyer can choose to do nothing). The payoff of a purchased call option is Changed line 28 from:
**'''written call''' -- This is the position of the seller of the asset. Since the spot price at expiration can be infinitely higher than the strike price, the writer of the call option can have unlimited loss. However, the writer of the call option can only gain an amount up to the future value of the premium (because if the spot value at expiration is too low, the purchaser of the put can choose to do nothing). The payoff of a written call option is to:
**'''written call''' (short call) -- This is the position of the seller of the asset. Since the spot price at expiration can be infinitely higher than the strike price, the writer of the call option can have unlimited loss. However, the writer of the call option can only gain an amount up to the future value of the premium (because if the spot value at expiration is too low, the purchaser of the put can choose to do nothing). The payoff of a written call option is Changed line 39 from:
**'''purchased put''' -- This is the position of the seller of the asset. Note that %red%the seller of the aseet purchases the put option%% (by paying the premium). When the spot price at expiration is sufficiently lower than the strike price, the purchaser of the put option gains from selling the asset, but only when the difference is more than the future value of the premium. The purchaser of the put option can gain at most an amount of the strike price minus the future value of the premium (when the strike price is 0), and can lose an amount up to the future value of the premium (because if the spot value of the asset is too high, the put pruchaser can choose to do nothing and keep the asset). The payoff of a purchased put option is to:
**'''purchased put''' (long put) -- This is the position of the seller of the asset. Note that %red%the seller of the aseet purchases the put option%% (by paying the premium). When the spot price at expiration is sufficiently lower than the strike price, the purchaser of the put option gains from selling the asset, but only when the difference is more than the future value of the premium. The purchaser of the put option can gain at most an amount of the strike price minus the future value of the premium (when the strike price is 0), and can lose an amount up to the future value of the premium (because if the spot value of the asset is too high, the put pruchaser can choose to do nothing and keep the asset). The payoff of a purchased put option is Changed line 47 from:
**'''written put''' -- This is the position of the buyer of the asset. If the spot price is too high, the seller won't sell the asset and the writer of the put gets to keep the premium. If the spot price is sufficiently low, the purchaser of the put will exercise the option and the writer of the put option can lose an amount up to the strike price minus the future value of teh premium. The payoff of a written call option is to:
**'''written put''' (short put) -- This is the position of the buyer of the asset. If the spot price is too high, the seller won't sell the asset and the writer of the put gets to keep the premium. If the spot price is sufficiently low, the purchaser of the put will exercise the option and the writer of the put option can lose an amount up to the strike price minus the future value of teh premium. The payoff of a written call option is Changed line 39 from:
**'''purchased put''' -- This is the position of the seller of the asset. Note that %red%the seller of the aseet purchases the put option to:
**'''purchased put''' -- This is the position of the seller of the asset. Note that %red%the seller of the aseet purchases the put option%% (by paying the premium). When the spot price at expiration is sufficiently lower than the strike price, the purchaser of the put option gains from selling the asset, but only when the difference is more than the future value of the premium. The purchaser of the put option can gain at most an amount of the strike price minus the future value of the premium (when the strike price is 0), and can lose an amount up to the future value of the premium (because if the spot value of the asset is too high, the put pruchaser can choose to do nothing and keep the asset). The payoff of a purchased put option is Changed lines 47-48 from:
**'''written put''' -- This is the position of the buyer of the asset. If the spot price is too high, the seller won't sell the asset and the writer of the put gets to keep the premium >>center<< payoff = -max{0, spot price at to:
**'''written put''' -- This is the position of the buyer of the asset. If the spot price is too high, the seller won't sell the asset and the writer of the put gets to keep the premium. If the spot price is sufficiently low, the purchaser of the put will exercise the option and the writer of the put option can lose an amount up to the strike price minus the future value of teh premium. The payoff of a written call option is >>center<< payoff = -max{0, strike price - spot price at expiration} Changed line 51 from:
>>center<< profit = -max{0, to:
>>center<< profit = -max{0, strike price - spot price at expiration} Changed lines 37-39 from:
*'''Put options'''-- to:
*'''Put options'''-- At the expiration date the seller can exercise the put option at the strike price or do nothing. So the seller has the right, but not the obligation, to buy the asset. The buyer offsets this disadvantage by charging a premium. **'''purchased put''' -- This is the position of the seller of the asset. Note that %red%the seller of the aseet purchases the put option.%% When the spot price at expiration is sufficiently lower than the strike price, the purchaser of the put option gains from selling the asset, but only when the difference is more than the future value of the premium. The purchaser of the put option can gain at most an amount of the strike price minus the future value of the premium (when the strike price is 0), and can lose an amount up to the future value of the premium (because if the spot value of the asset is too high, the put pruchaser can choose to do nothing and keep the asset). The payoff of a purchased put option is >>center<< payoff = max{0, strike price - spot price at expiration} >><< -->The profit of a purchased put option is >>center<< profit = max{0, strike price - spot price at expiration} - future value of premium >><< **'''written put''' -- This is the position of the buyer of the asset. If the spot price is too high, the seller won't sell the asset and the writer of the put gets to keep the premium, but this amount. If the spot price is sufficiently low, the purchaser of the put will exercise the option and However, the writer of the call option can only gain an amount up to the future value of the premium (because if the spot value at expiration is too low, the purchaser of the put can choose to do nothing). The payoff of a written call option is >>center<< payoff = -max{0, spot price at expiration - strike price} >><< -->The profit of a written call option is >>center<< profit = -max{0, spot price at expiration - strike price} + future value of premium >><< Changed lines 24-25 from:
to:
>>center<< profit = max{0, spot price at expiration - strike price} - future value of premium >><< Changed lines 32-33 from:
>>center<< profit = -max{0, spot price at expiration - strike price} + future value of premium to:
>>center<< profit = -max{0, spot price at expiration - strike price} + future value of premium Changed lines 23-27 from:
-->The ''profit'' of a purchased call option is %center% profit = max{0, spot price at expiration - strike price} - future value of to:
-->The ''profit'' of a purchased call option is %center% profit = max{0, spot price at expiration - strike price} - future value of premium %% **'''written call''' -- This is the position of the seller of the asset. Since the spot price at expiration can be infinitely higher than the strike price, the writer of the call option can have unlimited loss. However, the writer of the call option can only gain an amount up to the future value of the premium (because if the spot value at expiration is too low, the purchaser of the put can choose to do nothing). The payoff of a written call option is >>center<< payoff = -max{0, spot price at expiration - strike price} Deleted lines 28-31:
**'''written call''' -- This is the position of the seller of the asset. Since the spot price at expiration can be infinitely higher than the strike price, the writer of the call option can have unlimited loss. However, the writer of the call option can only gain an amount up to the future value of the premium (because if the spot value at expiration is too low, the purchaser of the put can choose to do nothing). The payoff of a written call option is >>center<< payoff = -max{0, spot price at expiration - strike price} >><< Changed lines 23-24 from:
-->The ''profit'' of a purchased call option is to:
-->The ''profit'' of a purchased call option is %center% profit = max{0, spot price at expiration - strike price} - future value of premium Changed line 24 from:
-->>>center<< profit = max{0, spot price at expiration - strike price} - future value of premium to:
--> >>center<< profit = max{0, spot price at expiration - strike price} - future value of premium Changed lines 23-24 from:
The ''profit'' of a purchased call option is >>center<< profit = max{0, spot price at expiration - strike price} - future value of premium to:
-->The ''profit'' of a purchased call option is -->>>center<< profit = max{0, spot price at expiration - strike price} - future value of premium Changed line 23 from:
to:
The ''profit'' of a purchased call option is Deleted lines 11-13:
**'''short forward''': This is the position of the seller of the asset. When the spot price at expiration is lower than the forward price, the seller gains. When the spot price is higher than the forward price, the seller loses. The seller can gain at most the forward price (when spot price is 0), but can lose an unlimited amount (because the seller may have to give up an asset that can have arbitrarily high value). The payoff for a short forward contract is >>center<< payoff = -(spot price - forward price) Added lines 14-17:
**'''short forward''': This is the position of the seller of the asset. When the spot price at expiration is lower than the forward price, the seller gains. When the spot price is higher than the forward price, the seller loses. The seller can gain at most the forward price (when spot price is 0), but can lose an unlimited amount (because the seller may have to give up an asset that can have arbitrarily high value). The payoff for a short forward contract is >>center<< payoff = -(spot price - forward price) >><< Changed line 10 from:
**'''long forward''': When the actual price of the asset on the experation date (''spot price'' at expiration) is higher than the forward price, the buyer gains. When the spot price is less than the forward price, the buyer loses. The buyer can have unlimited gain (because the asset may grow to have arbitrarily high value), but can only lose at most the forward price (when the spot price is 0). The ''payoff'' for a long forward contract is to:
**'''long forward''': This is the ''position'' of the buyer of the asset. When the actual price of the asset on the experation date (''spot price'' at expiration) is higher than the forward price, the buyer gains. When the spot price is less than the forward price, the buyer loses. The buyer can have unlimited gain (because the asset may grow to have arbitrarily high value), but can only lose at most the forward price (when the spot price is 0). The ''payoff'' for a long forward contract is Changed lines 13-14 from:
**'''short forward''': >>center<< payoff = forward price - spot price to:
**'''short forward''': This is the position of the seller of the asset. When the spot price at expiration is lower than the forward price, the seller gains. When the spot price is higher than the forward price, the seller loses. The seller can gain at most the forward price (when spot price is 0), but can lose an unlimited amount (because the seller may have to give up an asset that can have arbitrarily high value). The payoff for a short forward contract is >>center<< payoff = -(spot price - forward price) Changed lines 17-23 from:
*'''Call options''' -- At the expiration date the buyer has two choices: buy the asset (''exercise'' the call option) at the ''strike price'' (or ''exercise price''), or do nothing. So the buyer has the right, but not the obligation, to buy the asset. **'''purchased call''' **'''written call to:
*'''Call options''' -- At the expiration date the buyer has two choices: buy the asset (''exercise'' the call option) at the ''strike price'' (or ''exercise price''), or do nothing. So the buyer has the right, but not the obligation, to buy the asset. The seller offsets this disadvantage by charging a ''premium''. **'''purchased call''' -- This is the position of the buyer of the asset. When the spot price at expiration is sufficiently higher than the strike price, the buyer gains, but only when the difference is more than the future value of the premium. The purchaser of the call option can have unlimited gain, but can only lose an amount up to the future value of the premium (because if the spot value at expiration is too low, the buyer can choose to do nothing). The payoff of a purchased call option is >>center<< payoff = max{0, spot price at expiration - strike price} >><< -->The ''profit'' of a purchased call option is >>center<< profit = max{0, spot price at expiration - strike price} - future value of premium >><< **'''written call''' -- This is the position of the seller of the asset. Since the spot price at expiration can be infinitely higher than the strike price, the writer of the call option can have unlimited loss. However, the writer of the call option can only gain an amount up to the future value of the premium (because if the spot value at expiration is too low, the purchaser of the put can choose to do nothing). The payoff of a written call option is >>center<< payoff = -max{0, spot price at expiration - strike price} >><< -->The profit of a written call option is >>center<< profit = -max{0, spot price at expiration - strike price} + future value of premium >><< Changed line 10 from:
**'''long forward''': When the actual price of the asset on the experation date (''spot price'' at expiration) is higher than the forward price, the buyer gains. When the spot price is less than the forward price, the buyer loses. The buyer can have unlimited gain, but can only lose at most the forward price (when the spot price is 0). The ''payoff'' for a long forward contract is to:
**'''long forward''': When the actual price of the asset on the experation date (''spot price'' at expiration) is higher than the forward price, the buyer gains. When the spot price is less than the forward price, the buyer loses. The buyer can have unlimited gain (because the asset may grow to have arbitrarily high value), but can only lose at most the forward price (when the spot price is 0). The ''payoff'' for a long forward contract is Changed line 13 from:
**'''short forward''': When the spot price at expiration is lower than the forward price, the seller gains. When the spot price is higher than the forward price, the seller loses. The seller can gain at most the forward price (when spot price is 0), but can lose an unlimited amount (because the seller may have to give up an asset that can have arbitrarily high value). The to:
**'''short forward''': When the spot price at expiration is lower than the forward price, the seller gains. When the spot price is higher than the forward price, the seller loses. The seller can gain at most the forward price (when spot price is 0), but can lose an unlimited amount (because the seller may have to give up an asset that can have arbitrarily high value). The payoff for a short forward contract is Changed lines 18-26 from:
*''Call options'' -- At the expiration date the buyer has two choices: buy the asset (''exercise'' the call option) at the ''strike price'' (or ''exercise price''), or do nothing. There are six *long positions: Someone in these positions benefits from the price going up. ** *short positions: to:
*'''Call options''' -- At the expiration date the buyer has two choices: buy the asset (''exercise'' the call option) at the ''strike price'' (or ''exercise price''), or do nothing. So the buyer has the right, but not the obligation, to buy the asset. **'''purchased call''' **'''written call''' *'''Put options'''-- Changed lines 4-5 from:
Setup: the buyer and seller of an to:
Setup: the buyer and seller of an ''underlying asset'' enter into a contract in which the buyer agrees to buy the underlying asset from the seller at a price (called different things in different kinds of contracts) some time in the future, on the ''expiration date'' when the contract is settled. Changed lines 4-5 from:
Setup: the buyer and seller of an % to:
Setup: the buyer and seller of an %purple%underlying asset%% enter into a contract in which the buyer agrees to buy the underlying asset from the seller at a price (called different things in different kinds of contracts) some time in the future, on the ''expiration date'' when the contract is settled. Changed lines 8-10 from:
*''Forward contracts'' -- At the expiration date the buyer is obligated to buy the underlying asset at the ''forward price'', and the seller is obligated to sell. There are no ''premiums'', or initial payments. **''long forward'': When the actual price of the asset on the experation date (''spot price'' at expiration) is higher than the forward price, the buyer gains. When the spot price is less than the forward price, the buyer loses. The buyer can have unlimited gain, but can only lose at most the forward price (when the spot price is 0). The ''payoff'' for a long forward contract is to:
*'''Forward contracts''' -- At the expiration date the buyer is obligated to buy the underlying asset at the ''forward price'', and the seller is obligated to sell. There are no ''premiums'', or initial payments. **'''long forward''': When the actual price of the asset on the experation date (''spot price'' at expiration) is higher than the forward price, the buyer gains. When the spot price is less than the forward price, the buyer loses. The buyer can have unlimited gain, but can only lose at most the forward price (when the spot price is 0). The ''payoff'' for a long forward contract is Changed line 13 from:
**''short forward'': When the spot price at expiration is lower than the forward price, the seller gains. When the spot price is higher than the forward price, the seller loses. The seller can gain at most the forward price (when spot price is 0), but can lose an unlimited amount (because the seller may have to give up an asset that can have arbitrarily high value). The ''payoff'' for a short forward contract is to:
**'''short forward''': When the spot price at expiration is lower than the forward price, the seller gains. When the spot price is higher than the forward price, the seller loses. The seller can gain at most the forward price (when spot price is 0), but can lose an unlimited amount (because the seller may have to give up an asset that can have arbitrarily high value). The ''payoff'' for a short forward contract is Changed lines 4-5 from:
Setup: the buyer and seller of an to:
Setup: the buyer and seller of an %red%underlying asset%% enter into a contract in which the buyer agrees to buy the underlying asset from the seller at a price (called different things in different kinds of contracts) some time in the future, on the ''expiration date'' when the contract is settled. Changed lines 4-5 from:
Setup: the buyer and seller of an to:
Setup: the buyer and seller of an >>red<<underlying asset>><< enter into a contract in which the buyer agrees to buy the underlying asset from the seller at a price (called different things in different kinds of contracts) some time in the future, on the ''expiration date'' when the contract is settled. Changed lines 13-17 from:
to:
**''short forward'': When the spot price at expiration is lower than the forward price, the seller gains. When the spot price is higher than the forward price, the seller loses. The seller can gain at most the forward price (when spot price is 0), but can lose an unlimited amount (because the seller may have to give up an asset that can have arbitrarily high value). The ''payoff'' for a short forward contract is >>center<< payoff = forward price - spot price Changed lines 11-14 from:
>>center<< to:
>>center<< payoff = spot price - forward price Changed lines 4-9 from:
* ->The ->The seller gains when the spot price at expiration is lower than the foward to:
Setup: the buyer and seller of an ''underlying asset'' enter into a contract in which the buyer agrees to buy the underlying asset from the seller at a price (called different things in different kinds of contracts) some time in the future, on the ''expiration date'' when the contract is settled. The three basic kinds of contracts they can enter are *''Forward contracts'' -- At the expiration date the buyer is obligated to buy the underlying asset at the ''forward price'', and the seller is obligated to sell. There are no ''premiums'', or initial payments. **''long forward'': When the actual price of the asset on the experation date (''spot price'' at expiration) is higher than the forward price, the buyer gains. When the spot price is less than the forward price, the buyer loses. The buyer can have unlimited gain, but can only lose at most the forward price (when the spot price is 0). The ''payoff'' for a long forward contract is >>center<<spot price - forward price>><< **''short forward'': When the spot price at expiration is lower than the foward price, the seller gains and the buyer loses. The seller can gain at most the forward price (whe Changed lines 19-20 from:
*''Call options''-- to:
*''Call options'' -- At the expiration date the buyer has two choices: buy the asset (''exercise'' the call option) at the ''strike price'' (or ''exercise price''), or do nothing. (The buyer has the right, but not the obligation, to buy the asset.) Changed line 6 from:
*''Forward contracts''--the buyer agrees to buy the ''underlying asset'' from the seller at a price (''forward price'') some time in the future (on the ''expiration date''). The buyer is obligated to buy, and the seller is obligated to sell. There are no ''premiums'', or initial payments. to:
*''Forward contracts''--the buyer agrees to buy the ''underlying asset'' from the seller at a price (''forward price'') some time in the future (on the ''expiration date''). [This is a contract; nothing changes hand until the expiration date.] The buyer is obligated to buy, and the seller is obligated to sell. There are no ''premiums'', or initial payments. Changed line 11 from:
*''Call options''-- to:
*''Call options''--the buyer of the underlying asset Changed lines 7-13 from:
to:
->The buyer gains when the actual price on the experation date (''spot price'' at expiration) is higher than the forward price. ->The seller gains when the spot price at expiration is lower than the foward price. Added lines 1-22:
!!Derivatives Basics These are financial instruments whose prices are based on prices of other things. The three basic kinds of derivates are *''Forward contracts''--the buyer agrees to buy the ''underlying asset'' from the seller at a price (''forward price'') some time in the future (on the ''expiration date''). The buyer is obligated to buy, and the seller is obligated to sell. There are no ''premiums'', or initial payments. ->The buyer gains when The actual price on the experation date (''spot price'' at expiration) is higher than the forward price. ->The seller gains when The spot price at expiration is lower than the foward price. *''Call options''-- *''Put options''-- There are six ''positions''. In general, we always '''buy long and sell short'''. *long positions: Someone in these positions benefits from the price going up. ** *short positions: |