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Derivative Valuation

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Category – Derivative Valuation

Derivative valuation is the process of determining the fair value of a derivative, such as options, futures, or swaps, based on underlying assets. In trading, the value of derivatives is derived from the price movements of the underlying securities or commodities. Valuation methods include the Black-Scholes model for options or pricing models for futures contracts. Accurate derivative valuation is crucial for risk management, portfolio optimization, and for traders looking to speculate on asset price fluctuations.

HEDGING

Hedging is an investment to reduce the risk of adverse price movements in an asset.

CREDIT SPREAD

Credit spread is the difference in yield between securities with different credit qualities.

CONTANGO

Contango is a situation where the futures price of a commodity is higher than the spot price.

PUT OPTION

Put option is a financial contract giving the owner the right, but not the obligation, to sell a stock at a specified price.

DERIVATIVES

Derivatives are financial contracts whose value is dependent on the value of an underlying asset, group of assets, or benchmark.

COVERED CALL

Covered call is an options strategy where an investor holds a long position in an asset and sells call options on that same asset.

CALL OPTION

Call option is a financial contract that gives the holder the right, but not the obligation, to buy a security at a specified price within a specific time period.

BLACK-SCHOLES MODEL

Black-Scholes model is a mathematical model used to price options by determining the theoretical value of European-style options.

VOLATILITY INDEX (VIX)

Volatility index (VIX) is a real-time market index that represents the market's expectations for volatility over the coming 30 days.

CREDIT DEFAULT SWAP (CDS)

Credit default swap (CDS) is a financial derivative that allows an investor to 'swap' or offset their credit risk with that of another investor.