By Fred D. Arditti

This paintings discusses derivatives, masking all 4 significant different types. It includes info on institutional strategy and marketplace perform, explaining complex topics utilizing numerical examples.

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To exercise would mean that the long would buy the stock in the market at 50 and deliver it ("put it") to the writer (the short) at the strike of 45, losing 5 on the exercise in addition to the put premium of 4, for a net loss of 9. Since the put owner has the right to avoid this loss, he does so by not exercising. Clearly, a put with a 60 strike Page 8 would have provided greater profit opportunities. The higher the strike price, the more valuable the put. A direct relationship exists between the put premium and the strike price.

S. S. 7 Stripped Mortgage-Backed Securities (STRIPs) 366 References and Suggested Reading 375 Index 387 Page xiii PREFACE The term derivative instrument is generally accepted to mean a financial instrument with a payoff structure determined by the value of an underlying security, commodity, interest rate, or index. According to some notable surveys,1 over 80% of private sector corporations consider derivatives to be important in implementing their financial policies. Derivatives have also gained wide acceptance among national and local governments, government-sponsored entities, such as the Student Loan Marketing Association and the Federal Home Loan Mortgage Corporation, and supranationals, such as the World Bank.

Accounting for the put premium paid, 4, the net gain would be 11. If, instead, the stock price settled at 50 on expiration day, the put holder would choose not to exercise, but rather to let his put expire. To exercise would mean that the long would buy the stock in the market at 50 and deliver it ("put it") to the writer (the short) at the strike of 45, losing 5 on the exercise in addition to the put premium of 4, for a net loss of 9. Since the put owner has the right to avoid this loss, he does so by not exercising.

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