O'Reilly logo

Financial Calculus by Martin Baxter, Andrew Rennie

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

Chapter 1

Introduction

 

 

 

Financial market instruments can be divided into two distinct species. There are the ‘underlying’ stocks: shares, bonds, commodities, foreign currencies; and their ‘derivatives’, claims that promise some payment or delivery in the future contingent on an underlying stock’s behaviour. Derivatives can reduce risk – by enabling a player to fix a price for a future transaction now, for example – or they can magnify it. A costless contract agreeing to pay off the difference between a stock and some agreed future price lets both sides ride the risk inherent in owning stock without needing the capital to buy it outright.

In form, one species depends on the other – without the underlying (stock) there could be no future ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required