Chapter 8 Risk management financial futures options swaps and other hedging tools Distinguish between options futures swaps Swaps not far from a swapshop or flea market done with currencies Mark to market Daily settlement on losses interest rate futures forwards o There is no mark to market you deal with buy and seller o No standard contracts o Exchanges undergoes CBOT o Under clearing houses o They ll never know about each other Shorting if you short something it involves betting against the market o If you are trying to avoid higher borrowing costs or drop in asset prices o If price of something goes down higher borrowing costs Long V Short Basis risk o When you are long you are betting for the market you are a holder of the asset o This risk moves and that s why it s very risky o The basis changes it s a moving target Current to futures something basis Will not need to calculate numbers of contracts ergo and contract ratio Options o You have an option only one person has the option o The one who writes the check is the owner of the option An option when you are shot PUT An option when you are long call The buyer of the option if buying a put wants it to go dwon If you are the seller you want it to go long If you are a call buyer The writer is the one who receives the fee before receiving the fee you have to wait for your orders If you are a naked writer things could get bad you don t have the position open interest established but not yet off set or exercised o Used to get a feel for the market o If open interest is swelling its indicative of a lot of people placing bets OCC office of comptroller and currency Risk measures of strategic reputation price and liquidity swaps mostly interest rate related LIBOR
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