Reading Assignment: Lesson 10

Seng - Chapter 7, 8, and 9

Errera & Brown - Chapters 4 & 6
This text is available to registered students via the Penn State Library.

Non-exchanged traded financial derivatives are known as "over-the-counter" (OTC).
Swaps and spreads trade OTC while options are exchanged and OTC traded.
Swaps are exchanges of payments between two buyers are financially settled.
Swaps are normally "fixed-for-floating" whereby one price is the current market price ("fixed") and the other price is the future settlement price ("floating").
Spreads are trades which occur between commodity locations and times, as well as intra-market and inter-market.
Options give the holder of the option the right but not the obligation to buy or sell a commodity at a particular price for a specific date and location in the future.
Options are price risk insurance, and a premium is paid for options contracts.
Premiums paid are substantially less than the outright commodity contracts.
Option premiums are determined using mathematical models. The most well-known is the Black-Sholes.
"Put" options give the buyer a "floor" price, whereas "call" options establish a "ceiling" price for the buyer.
Options buyers are only exposed to the cost of the premiums.
The seller (writer) of an option assumes all the risk.