6 April



Fill in the blanks using the words from the box below:

contracts         determined      hedge       speculative      dependent         market
indexes        derived     merely        swaps


Derivative - in finance, a security whose price is 1. ______________ on or 2.______________
from one or more underlying assets. The derivative itself is 3.______________ a contract between
two or more parties. Its value is 4.______________ by fluctuations in the underlying asset. The
most common underlying assets include stocks, bonds, commodities, currencies, interest rates and
5.______________. Futures contracts, forward contracts, options and 6. ______________ are the most
common types of derivatives. Because derivatives are just 7.______________, just about anything
can be used as an underlying asset. There are even derivatives based on weather data, such as the
amount of rain or the number of sunny days in a particular region. Derivatives are generally used
to         8. ______________ risk, but can also be used for 9. ______________ purposes.

NOTE:

The difference between futures and forwards is that futures are standardized deals and forwards are
individual ´over-the-counter´ agreements between two parties.

 The risk with currency and interest rate swaps is that the exchange and interest rates may change
unfavourably.


CB 92/Discussion

Complete the gaps using the words that will fit the context.

1 If the price of cocoa does change before the date of the …………………………. contract, wither the
producer or the buyer will have lost money by signing the contract.

2 The company could try to arrange an interest rate ………………………….with a company with ………………………….rate
debt that expected interest rates to rise.

3 Such an investor can buy a ………………………….option giving the right to ………………………….the stock in the
future at the current market price.

4 Such an investor can buy a ………………………….option giving the right to ………………………….the stock in the
future at the current market price.

5  “………………………….” is the situation when one party´s gains are equal to the other party´s losses, e.g
futures, options and swaps. In contrast, “………………………….” are mutually beneficial such as negotiations
and business partnerships.