As a result of quantitative driven synthetic derivatives and other constructs by investment bankers and traders since the 1990s, an entirely separate derivatives creation and trading has emerged. International market expansion created the need for foreign currency hedges. Credit default swaps for risk mitigation have exploded in their ubiquity. Equity and interest rate derivatives have also expanded their open interest significantly.
A derivative product company (DPC) is a special purpose vehicle that is most often a subsidiary of a securities firm or a financial institution, and is created to specifically handle derivatives related risk offset work. In order to require the minimum amount of capital to operate, they are structured in such a way as to be able to obtain AAA status. This allows the DPC to function without posting collateral that might be required when dealing with a counterparty of like rating.
Usually armed with a team of quantitative analysts, the DPC is equipped to customize a derivative for a client to offset most any kind of market risk in which the parent also engages. An analogy to the DPC is like Star Lord in Guardians of the Galaxy 2. As the only offspring of the godlike Ego to be worthy of wielding his power, Peter Quill, a.k.a. Star Lord, was the AAA offspring being groomed for the select but lucrative new horizons Ego wished to conquer.
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Finance: What Is a Call Option?25 Views
finance a la shmoop. what is a call option? option? option, where are you? okay
yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]
is the right to call or buy a security. the concept is easy the math is hard.
you think Coca Cola's poised for a breakout as they go into the new low
calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]
call option for $1. well that call option buys you the right
to then buy coke stock at 55 bucks a share anytime you want in the next
hundred and 20 days. so let's say Coke announces its new sugarless drink flavor
zero it's two weeks later and the stock skyrockets to fifty eight dollars a
share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]
so you buy the stock and you're all in now for fifty five dollars plus one or
fifty six bucks a share and your total value is now fifty eight bucks. well you
could turn around today and sell the bundle that moment, and you'll have
turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]
stock not skyrocketed so quickly well you would have lost everything. still you
lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]
options. as for Coke flavor zero turned out to be nothing more than canned water.
Up Next
A derivative of a security is a "something" which derives its value based on the performance of that security... either a put option or a call option.
What is a put option? A put option is a type of contract that lets the investor sell shares of a stock at a certain price and within a window of ti...