Option trading

An option is a financial instrument that gives one party the right, but not the obligation, to buy or sell an underlying asset from or to another party at a fixed price over a specific period of time.

1. An option that gives the right to buy is referred to as a call option .
2. An option that gives the right to sell is referred to as a put option.
3. The fixed price which the underlying can be bought or sold is called the exercise price or strike price.
4. The action of buying or selling the underlying at the exercise price is called exercising the option.
5. The holder of the option has the right to exercise it and will do so if the situation is advantagous;
6. Otherwise, the option will expire worthless, unexercised.
7. The price that the option buyer pay to the option seller is called the premium.
8. Option contract can be created between the buyer and seller of an option with their arranged terms.

Swap

A swap is a variation of a forward contract that is esentially equivalent to a series of forward contracts.
A swap is an agreement between 2 parties to exchange a series of future cash flows. Typically at least one of the 2 series of cash flows is determined by a later outcome.

One party agrees to pay the other a series of cash flows whose value will be determined by the unknown future course of some underlying factor, such as interest rate, exchange rate, stock price or commodity price.

Swap payments can be fixed or floating (variable).

Futures Contract

A futures contract is a variation of a forward contract that has effentially the same basic defination but some aditional fetures that cleartly distinguish it from a forward contract.

A Futures contact is not a private and customized transaction. it is a public, standardized transaction that takes place in a futures exchange.

A futures exchange, like a stock exchange, is an organisation that provides a facility for engaging in futures transactions and establishes a mechanism through which parties can bug and sell these contracts.
The contracts are standardized which means the exchanges determines the expiration dates, the underlying, how many units of the underlying are included in one contract, and other various terms and conditions.

The most important distinction between a futures contract and a forward contract is the default risk associated.
The futures exchange guarantees to each party that if the other fails to pay, the exchange will pay.

The clearing house protects itself by requiring the parties to settle their gains and losses to the exchange on a daily basis, or what is known as daily settlement or mark to market.

Forward Contract

The forward contract is an agreement between 2 parties in which one party, the buyer, agrees to buy from the other party, the seller, an underlying asset at a futuredate at a price established at the start.
The parties to the transaction specify the forward contract's terms and conditions, such as when and where delivery will take place and the precise identity of the underlying.
The contract is said to be customized.

Each party is subject to the possibility of that the other party wil default.(Counter Party Risk)

Derivative

A Derivative is a financial instrument that offers a return based on the return of some other underlying asset.

A derivative has a defined and limited life.
A derivative contract initiates on a certain date and terminats on a later date.
Often the derivative's payoff is determined and/or made on the expiration date, although that is not always the case.

In accordance with the usual rules of the law, a derivative contract is an agreement between 2 parties in which each does something for the other.

Components of GDP

Spending in the economy takes many forms.



To understand how the economy is using its scarce resources, economists are often interested in studying the composition of GDP among various types of spending. To do this, GDP (denoted as Y) is divided into four components: Consumption (C), investment (I), Government purchases (G), and net exports (NX);



Y = C + I + G + NX



The equation is an identity, - an equation that must be true by the way the variables in the equations are defined. In this case, because each dollar of expenditure included in GDP in placed into one of the four components of GDP, the total of the four components must be equal to GDP.



Consumption



Consumption is spending by households on goods and services. "Goods" include household spending on durable goods, such as automobiles and appliances, and non-durable goods, such as food and clothing. "Services" include each intangible items as haircuts and medical care. Household spending on education is also included in consumption of services (although one might argue that it would fit better in the next component).



Investment



Investment is the purchase of goods that will be used in the future to produce more goods and services. It is the sum of purchases of caputal equipkent, inventories, and structures. Investment in structures includes expenditure on new housing. By convention, the puchase of a new house is the one form of household spending categorized as investment rather than consumption.



The treatment of inventory accumulation is noteworthy. When IBM produces a computer and, instead of selling, IBM adds it to the inventory, IBM is assumed to have "purchased" the computer for itself. That is, the national income accountants treat the computer as part of IBM's investment spending. Inventories are treated in this way because one aim of GDP is to measure the value of economy's production, and goods added to inventory are part of that period's production.



Government Purchases



Government purchases include spending on goods and services by local, state and federal governments. It includes the salaries of government workers and spending on public works.



The meaning of "Government Purchases" requires a bit of clarification. When the government pays the salary of an Army general, that salary is part of Government purchases. But what happens when the government pays a Social Security benefit to one of the elderly? Such government spending is called a transfer payment because it is not made in exchange ofr a currently produced good or service.

Transfer payments alter household income, but they do not reflect the economy;s production. (From a macroeconomic standpoint, transfer payments are like negative taxes.) Because GDP is intended to measure income from, and expenditure on, the production of goods and services, transfer payments are not counted as part of government purchases.



Net Exports



Net Exports equal the pucahses of domestically produces goods by foreigners (exports) minus the domestic purchases of foreign goods (imports). A domestic firm's sale to a buyer in an another country, such as Boeing sale to British Airways, increases net exports.

Circular Flow Diagram

Household buy goods and services from firms, and firms use their revenue from sales to pay wages to workers, rent to landowners, and profit to firm owners. GDP equals the total amount spent by households in the market for goods and services. It also equals the total wages, rent, and profit paid by firms in the markets for the factors of production.