1. Economics 434 Financial Markets Professor Burton University of Virginia Fall 2015 December 1, 2015

2. The Derivatives Market Exchange Traded Derivatives – Options – Futures Over the Counter Derivatives (not traded on exchanges) – Forwards – Swaps (including CDS, credit default swaps) December 1, 2015

3. Imagine XYZ stock currently trading at $ 40 per share What would be an example of a “call” option? A call option – Will be for 100 shares – Must have an expiration (maturity) date – Must have an “exercise” or “strike”price A “Jan 45” call gives its owner the right to buy 100 shares of XYZ for $ 4,500 at any time between now and the end of January December 1, 2015

4. Value Just Before Expiration December 1, 2015 4050Current Stock Price Value of Option 10

5. Value Long Before Expiration December 1, 2015 4050Current Stock Price Value of Option

6. Futures Contract What would a gold future look like, assume current (spot) price of Gold is 1100? It would provide a date and a quantity of Gold, lets assume 10 troy ounces (which would cost $ 11,100 in the spot market) February 2016 Gold would “require” the owner to buy gold at what at whatever price they paid for the future (times 10) December 1, 2015

7. Example Suppose Jan 16 Gold is trading at 1120 Then, no matter where gold is trading at the end of January, the owner must pay $ 11,200 and will receive 10 troy ounces in physical gold Expiration date is called a delivery date in the futures market December 1, 2015