An Introduction to Forwards and Options推荐.pdfVIP

2 An Introduction to Forwards and Options This chapter introduces the basic derivatives contracts: forward contracts, call options, and put options. These fundamental contracts are widely used, and serve as building blocks for more complicated derivatives that we discuss in later chapters. We explain here how the contracts work and how to think about their risk. We also introduce an extremely important tool for analyzing derivatives positions—namely, payoff and profit diagrams. The terminology and concepts introduced in this chapter are fundamental and will be used throughout this book. 2.1 FORWARD CONTRACTS To understand a forward contract, it is helpful to first consider the process of buying or selling stock. Such a transaction entails at least three separate steps: (1) the buyer and seller agree to transact and set the price to be paid, (2) cash is transferred from the buyer to the seller, and (3) shares are transferred from the seller to the buyer. Typically, steps 2 and 3 occur shortly after the buyer and seller agree to transact.1 However, as a logical matter, a price could be set today and the transfer of shares and cash could then occur at a specified date in the future. This is in fact the definition of a forward contract: It sets today the terms at which you buy or sell an asset or commodity at a specific time in the future. A forward contract does the following: . Specifies the quantity and exact type of the asset or commodity the seller must deliver. . Specifies delivery logistics, such as time, date, and place. . Specifies the price the buyer will pay at the time of delivery. . Obligates the seller to sell and the buyer to buy, subject to