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Swaps are agreements to exchange a series of payments on periodic
settlement dates over a certain time period. They are not traded in a
secondary market and are mostly unregulated. Most swap participators are
institutions.
At each payment date, the difference between the swap fixed rate and
the variable rate is paid to the party that owed the least, that is, a
net payment is made from one party to another.
Costs of holding an asset increase its no-arbitrage forward price.
Benefits from holding the asset, such as dividends or convenience yield,
decrease its no-arbitrage forward price.
When the underlying asset is giving a dividend.
is difficult to sell short. It is a non monetary benefit.
Trading one set of floating rate payments for another.
risky asset + derivative = risk-free assetor any other variation of this formula
An insurance contract against default. A bondholder pays a series of
cash flows to a credit protection seller and riches a payment if the
bond issuer defaults.
positively correlated with future prices.
risk-neutral probability of an up move:1 + Rf - D / U - Ddown move: 1 - above formula
The number of future contracts
Occurs when assets are mispriced.
the net cost of holding an asset, considering both the costs and benefits of holding the asset.
Where forwards and swaps are traded/created by dealers in a market
with no central location. This is a largely unregulated market and each
contract is with a counterparty.
Long call=right to buyLong put = right to sellShort call = obligation to sellShort put = obligation to buy
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