the Market and Products

· the Market
Exchange-traded Market
 - trade standardized contracts
Over the counter Market
 - trade customized contracts: market participants are free to negotiate any mutual attractive trade.

· the Products
Forward contracts 
- agreement to sell and buy an asset at a certain future time for a certain price 
- contrast to a spot contract - agreement to sell and buy today.

Future contracts

- agreement to sell and buy an asset at a certain future time for a certain price 

What is the difference between forward and futures contracts?


Differences Conclusion:

forward: OTC, settlement happens at the end of the contract, used by hedgers mostly -  delivery of the asset or cash settlement will usually take place.
future:  exchanged-traded, marked-to-market daily, used by speculators mostly- they are usually closed out prior to maturity and delivery usually never happens.


Fundamentally, forward and futures contracts have the same function: both types of contracts allow people to buy or sell a specific type of asset at a specific time at a given price.

However, it is in the specific details that these contracts differ. First of all, futures contracts are exchange-traded and, therefore, are standardized contracts. Forward contracts, on the other hand, are private agreements between two parties and are not as rigid in their stated terms and conditions. Because forward contracts are private agreements, there is always a chance that a party may default on its side of the agreement. Futures contracts have clearing houses that guarantee the transactions, which drastically lowers the probability of default to almost never.

Secondly, the specific details concerning settlement and delivery are quite distinct. For forward contracts, settlement of the contract occurs at the end of the contract. Futures contracts are marked-to-market daily, which means that daily changes are settled day by day until the end of the contract. Furthermore, settlement for futures contracts can occur over a range of dates. Forward contracts, on the other hand, only possess one settlement date.

Lastly, because futures contracts are quite frequently employed by speculators, who bet on the direction in which an asset's price will move, they are usually closed out prior to maturity and delivery usually never happens. On the other hand, forward contracts are mostly used by hedgers that want to eliminate the volatility of an asset's price, and delivery of the asset or cash settlement will usually take place.

Options
both on OTC and Exchange: but most of the options are traded in exchange in America.
America Option can be exercised at anytime up to the expiration date.
- Chicago Board Options Exchange

-call option: buy
- put option: sell


SWAP
-The most common type of swap is 'plain vanilla' interest rate swap.


Chapter 8 Option Market - mainly about stock options
Terminologies:
- call option, the right to buy - hoping the stock price is increase (stock price>strike price)
- put option, the right to sell - hoping the stock price is decrease  (stock price<strike price).
EX: Europe Option, on the maturity date, the current price of APPLE is $500, the strike price of Option is $550, then you can first buy the pertinent amount of stocks from market in $500/share and then exercise the Option by selling those stocks to the market maker in $550, earn $50/share. You can do early exercise in American Option Market.
- expiration date or maturity
- exercise price or strike price
- Four types of Positions
Customer bought options from Institutions
1. Long Position in a Call Option
2. Long Position in a Put Option
Institution sold options to Customers
3. Short Position in a Call Option
4. Short Position in a Put Option

Underling Assets of Option:
1. Stock Option 2. Foreign Currency Option 3.Index Option 4. Future Option

Offsetting Order 平仓
Commission 佣金

Definition of 'Naked Option'

A trading position where the seller of an option contract does not own any, or enough, of the underlying security to act as protection against adverse price movements. If the price of the underlying security moves against the trader, who does not already own the underlying security, he or she would be required to purchase the shares regardless of how high the price is. The potential for losses, then, can be unlimited, and as a result, brokers typically have specific rules regarding naked trading. Inexperienced traders, for example, would not be allowed to place this type of order.

LIBOR curve
The LIBOR curve and the Treasury yield curve are the most widely-used proxies for the risk-free interest rates. Although not theoretically risk-free, LIBOR is considered a good proxy against which to measure the risk/return tradeoff for other short-term floating rate instruments
.