1. futures | Trading in shares and commodities for delivery at a later date. |
2. mortgage | Contract for buying a property using the property as security for a long- term loan |
3. commodity | Goods sold in large quantities, e.g. raw materials. |
4.security | Investments in stocks and shares. |
5.equity | Right to receive dividends on the shares you own in acompany. |
6. price of hogs | A live hog futures market establishes prices for hogs that will not be delivered until sometime in the future. |
7. underlying | To be a hidden cause or strong influence on something. |
8. estimate | To guess the cost, size, value, etc of something. |
9.trade | To buy and sell, he trades in shares. |
10. exchanges | Giving one thing for another |11.speculate | To buy goods, property, shares, etc, hoping to make the profit when you sell them, but with the risk of losing money. |
12.price of stock | The market value of anything being offered for sale. |
13. option | Right to buy/sell shares at a certain price on a future date. |
14 swap | The exchanging of one security for another of the same value. |
15.hedge | Protection, security. |16.to plummet | To fall very quickly and suddenly. |
17. leverage | Ratio between capitals borrowed and value of shares. |
18. parties | Groups of people involved in an official arrangement. |
19.renege | To fail to keep a promise or an agreement. |
In the last 30 years derivatives have become increasingly important in finance.
Futures and options are now traded actively onmany exchanges throughout the
World. Many different types of forward contracts, swaps, options, and other derivatives are regularly traded by financial institutions, fund managers, and corporate treasurers in the over- the-counter market. Derivatives are added to bond issues, used in executive compensation plans, embedded in capital investment opportunities, and so on. We have now reached thestage where anyone who works in finance needs to understand how derivatives work, how they are used, and how they are priced.
A derivative can be defined as a financial instrument whose value depends on (or derives from) the values of other, more basic, underlying variables. Very often the variables underlying derivatives are the prices of traded assets. A stock option, for example, is a derivatewhose value is dependent on the price of a stock.
However, derivatives can be dependent on almost any variable, from the price of hogs to the amount of snow falling at a certain ski resort.
Since 1988 there have been many developments in derivatives markets. There is now active trading in credit derivatives, electricity derivatives, weather derivatives, and insurance derivatives. Many new typesof interest rate, foreign exchange, and equity derivative products have been created.
There have been many new ideas in risk management and risk measurement.
Analysts have also become more aware of the need to analyze what are known as real options.
In this opening chapter we take a look at exchange and over the counter (OTC) markets
Write the word from the text that matches each sentence.It’s a financial instrument whose value depends on the value of another financial in strum
They are the institutions that trade derivatives.
They have been experimenting changes in the last 23 years.
They have become very important in finance in the last years.
More aware of the ne analyze what are knows real options
It derives its price from the price of stock. Prince of a stock however
Theyare traded in OTC markets.
Answer the next questions according to the text.
Write the kinds of derivatives mentioned in the text.
What are the new fidelds developed to control risk?
What are the financial institutions that trade derivatives?
Mention the new types of derivates created
Do you consider it’s important to know to know about derivatives? Why? Why not?.