ESP 2- KEY Unit 6: Futures & Derivatives 1 a.

Match up the following words and definitions 1-B 2-A 3-F 4-C 5-E 6-D.
1b. Reading Select ten or eleven of the following words that you would expect to find in an introductory text about futures and options assets copper hedge shout beer currencies liabilities spot market bush discount plastic tea call commodities discount store phone raw materials supermarket contracts foodstuffs

Based on students knowledge

1c Summarizing Complete the following sentences. 1 The difference between futures and forward contracts is Futures: Standardized deals Forward contracts: individual, non-standard, over-the-counter deals 2 Producers and buyers often choose to hedge because This allows them to guarantee prices for several months 3 Speculators can make money on currency futures if If they correctly anticipate exchange rate appreciations, depreciations or interest rate changes.

4 If you believe that a share price will rise, possible option strategies include Possible option strategies include buying a call, which you will be able to sell at a profit, and writing a put, which will never be exercised, so you can earn premium. 5 On the contrary, if you think a share price will fall, possible option strategies include Buying a put, so you will be able to sell your shares at above the market price, and writing a call, which will never be exercised, so you earn the premium 6 The risk with currency and interest rate swaps is that The exchange and the interest rate may change un favorably 1d Vocabulary Find words in the text that are in an obvious sense the opposite of the terms below. appreciate depreciate call - put discount - premium drought- flood floating - fixed hedging - speculation spot market futures market strike price market price EX 1: A. Decide whether the following statements are True or False 1. T - The price of a futures contract is determined at the moment the contract is made. 2. F- Hedging is another name for speculating. 3. F- Futures prices are always higher than spot prices, because they contain interest charges. 4. T- In options, call means buy and put means sell. 5. F- The amount of money one can make or lose on an options contract is determined at the moment the contract is made. 6. T- You can sell an option to sell an asset you do not actually possess. 7. T- If you think a share will rise, you can profit by buying a call option or writing a put option giving someone else the right to sell the shares at the current price.

8. F- It you think the value of a share you own will fall below its current price, you can profitably buy a call option at this price (or higher) or write a put option. 9. T- A put option has intrinsic value if its exercise price is above the current market price of the underlying share. 10. F- A call option with an exercise price below the underlying shares current, market price is out-of-money. B. Match up the following words (using them more than once if necessary) to make up at least ten two-word nouns: call option forward contract financial market futures market financial instrument raw materials strike price primary market spot market C. Match up the following words or expressions to make eight pairs of opposites: call option - put option discount drought - premium - flood

exercise price- market price futures market - spot market hedging - speculation in-the-money - out-of-the-money obligation right

1. Find words and phrases in the text to complete the sentences. 1. A ______put option ____ ___________ is contract giving the possibility to sell a specified quantity of securities, foreign exchange or commodities in the future, if it is advantageous to do so.

2. ___commodities___________ are raw materials such as agricultural products and metals that are traded on special exchanges. 3. __futures____________ are forward contracts for the purchase and sale of securities, precious metals, etc,at a fix price. 4. A______call option_____ ___________ is a contract giving the buyer the right, but not the obligation, to buy an asset in the future. 5. If you_____hedge________ you make transactions that are designed to reduce risk regarding a particular price, interest rate or exchange rate. 6. An ________interest rate swap ____ _____________ ____________ is an exchange of future payments on borrowed money according to specified terms. 7. If you ______excercise___________ an option you use or implement the option, taking up the possibility to buy or sell something. 8. A _____speculator___________ anticipates future changes in a market and makes risky transactions, hoping to make a gain. 9. A _____premium___________ is the money the writer of an option receives 2. Use a word or phrase from each box to make word combinations from the text. You can use some words more than once. Then use some of the word combinations the complete the sentences below. determine interest payments eliminate options exercise prices guarantee risks reduce uncertainty swap 1. Companies with fixed and floating loans can choose to _swap interest payments_ ____ 2 Futures contracts allow you to ___ eliminate ________ short-term____ risks 3. Hedging is the attempt to reduce risks / uncertainty __________ ; speculating is the opposite. 4. If prices move the wrong way, the buyer of ___options______do not____excercise_____them. 5 With futures, you can _determine prices/ guarantee prices_____ several months in advance.

A. Match the two parts of the sentences. Look at A opposite to help you.

1. C-- The price of a derivate always depends on 2. A--Options can be used to hedge against 3. B--A call option gives its owner product. 4. D--A put option gives its owner

a. future price changes. b. the right to buy something. c. the price of another financial d. the right to sell something.

B. Choose the correct ending for the sentences. Some sentences have more than one possible ending. Look at A and B opposite to help you. 1.A,D--- If you expect the price of a stock to rise, you can a. buy a call option. b sell a call option. c. buy a put option. d. sell a put option. 2. B,C---If you expect the price of a stock to fall, you can a. buy a call option b. sell a call option. c. buy a put option. d. sell a put option. 3. B---If an option is out- of- the- money it will 4. A---If an option is in-the-money the seller will 5. A---The bigger risk is taken by a. be exercised. b. not be exercised. a. lose money b. gain money. a. writers of options. b. buyers of options.

C. Complete the definitions. Look at A, B and C opposite to help you. WARRANTS are like call options, but with much longer time spans.
SWAPS give the right to sell securities at a fixed price within

a specified period. PUT OPTIONS . can be used to speculate on interest rate movements.

D. Complete these sentences using words from A, B and C opposite. 1. If your put option is out-of-the-money, the seller will gain the PREMIUM. 2. You only exercise a call option if the market price is higher than the STRIKE/ EXERCISE PRICE

3. If I expect a stock price to go up in the short term, I buy CALL OPTIONS. .. instead of the stock. 4. If I expect a big companys stock price to go up in the long term. I sometimes buy their WARRANTS 5. We needed euros and had a lot of dollars in the bank, so we did a SWAP. with a German company which needed dollars.

A. Match the word in the box with the definitions below. Look at A opposite to help you. Backwardation To hedge Commodities Over-the-counter Forwards Spot price Futures

1. Spot price : the price for the immediate purchase and delivery of a commodity 2. Backwardation : the situation when the current price is higher than the future price 3. Over-the-counter: adjective describing a contract made between two businesses, not using an exchange 4. Forwards: contracts for non- standardized quantities or time periods 5. Commodities : physical substance, such as food, fuel and metals, that can be bought or sold with futures contracts 6. To hedge: to protect yourself against loss 7. Futures contracts to buy or sell standardized quantities B. Complete the sentences using a word or phrase from each box. Look at A and B opposite to help you. A commodity futures allow B interest rate futures allow C currency futures allow U banks V companies W farmers X food manufactures Y importers Z investors

1A,X.. to charge a consistent price for their products

2B,Z.. to be sure of the rate they will get on bonds which could be issued at a different rate in the future 3B,V.. to know at what price they can borrow money to finance new projects 4A,W.. to make plans knowing what price they will get for their crops 5B,U.. to offer fixed lending rates 6C,Y.. to remove exchange rate risks from future international purchases A. Are the following statements true or false? Find reasons for your answer in B opposite. 1. T --- Financial futures were created because exchange rates, interest rates and stock prices all regularly change. 2. F----Interest rate futures are related to stocks and shares. 3. T---Financial futures contracts allow companies to protect themselves against shortterm changes in exchange rates. 4. T----You can only hedge if someone who expects a price to move in the opposite direction is willing to buy or sell a contract. 5. F----Both parties can make money out of the same futures contract.