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Continuing on the example above, suppose now that the initial price of Alice's house is $100,000 and that Bob enters into a forward contract to buy the house one year from today. But since Alice knows that she can immediately sell for $100,000 and place the proceeds in the bank, she wants to be compensated for the delayed sale.
In finance, a volatility swap is a forward contract on the future realised volatility of a given underlying asset. Volatility swaps allow investors to trade the volatility of an asset directly, much as they would trade a price index. Its payoff at expiration is equal to
A delta one product is a derivative with a linear, symmetric payoff profile. That is, a derivative that is not an option or a product with embedded options. Examples of delta one products are Exchange-traded funds, equity swaps, custom baskets, linear certificates, futures, forwards, exchange-traded notes, trackers, and Forward rate agreements.
A cliquet option or ratchet option is an exotic option consisting of a series of consecutive forward start options. [1] The first is active immediately. The second becomes active when the first expires, etc. Each option is struck at-the-money when it becomes active. [2]
Its primary applications are for pricing options on future contracts, bond options, interest rate cap and floors, and swaptions. It was first presented in a paper written by Fischer Black in 1976. Black's model can be generalized into a class of models known as log-normal forward models.
An Asian option (or average option) is an option where the payoff is not determined by the underlying price at maturity but by the average underlying price over some pre-set period of time. For example, an Asian call option might pay MAX(DAILY_AVERAGE_OVER_LAST_THREE_MONTHS(S) − K, 0). [4]
The payoff at maturity depends not just on the value of the underlying instrument at maturity, but also on its value at several times during the contract's life (for example an Asian option depending on some average, a lookback option depending on the maximum or minimum, a barrier option which ceases to exist if a certain level is reached or ...
The swap contract therefore, can be seen as a series of forward contracts. In the end there are two streams of cash flows , one from the party who is always paying a fixed interest on the notional amount, the fixed leg of the swap, the other from the party who agreed to pay the floating rate, the floating leg .