Financial Derivatives

Collateralised Debt Obligation, ABS where the underlaying assets are bonds.

It's called the equity trance and is taking the gratest risk.

A promise to pay cash flows to investors in a prescribed sequence, based on how much cash flow the CDO collects from the pool of bonds or other assets it owns.

Variation of a CDO that generally uses credit default swaps and other derivatives to abtain ist investment goals.

Options which are nonstandard.

This option can be excercised on specific dates.

An option tha t pays off St-K1 when St > K2.

An option that starts at some point in the future (employee stock options)

Options on options, Call that lets you buy another call.

Option that lets you decide after some time if it is a put or a call.

Payoff depends if the underlaying hits a certain level premaurely.

Discontinuous payoff options.

Payoff depends on maximums or minimums of underlaying asset over the option life.

Payoff depends on average price of the underlaying over the option life.

Rainbow options: Delivery on a large number of assets; Basket options: Depends on the performance of a basket.

Company's performance depends heavily on the weather.

It is a reinsurance

Any OTC product requiring tailoring or "structuring" to provide a specific risk exposure to suit customers' needs. In real life mostly a bond and an option.

The options never pay off to the customers; The fees might not be fair; If the bond defaults.

Not getting teir principal guarantees - Issuer credit; too little capital - Excessive leverage; only long - Long Bias.

Excessive leverage, misunderstand complex risks, tail risks, excessive risk-taking, poor diversification, Mishedging, risk managemnet failure.

Economic contract whose value depends on the value of another instrument or underlaying.

Stocks, Commodities, Events, Corporate Bonds, Indices, Weather etc.

Electronically over an exchange or OTC by telephone etc.

Agreement to buy or sell an asset at a specific time in the future at a specific price.

Same as a future contract but traded OTC and is more specific.

They are either physically or cash settled.

Futures are less flexible are standardised, quickly understood and have a higher volumen; Forwards are more flexible and can hedge precise exposure and tiemframe, have more paperwork.

An opportunity to generate a profit that is riskless by selling an identical asset for a higher price in one venue and buying it for a lower prica at another venue - instantaneously.

Given a change in price of the underlaying asset, the futures change and equivalent amount.

Specified asset quality/grade. Financial underlaying precise, contract size prespecified, where/when delivery is made is prespecified. Physical or cash settlement.

Protect agianst bankrupty or market manipulation by one market participant/counterparty.

Each day both buyers and sellers adjust their margin reflecting the profitability of their position.

The broker will close out the position.