EBF 301
Global Finance for the Earth, Energy, and Materials Industries

Reading Assignment: Lesson 10


Reading Assignment:

Seng - Chapter 7, 8, and 9

Errera & Brown - Chapters 4 & 6
This text is available to registered students via the Penn State Library.

Key Points of Emphasis

  • Non-exchanged traded financial derivatives are known as "over-the-counter" (OTC).
  • Swaps and spreads trade OTC while options are exchanged and OTC traded.
  • Swaps are exchanges of payments between two buyers are financially settled.
  • Swaps are normally "fixed-for-floating" whereby one price is the current market price ("fixed") and the other price is the future settlement price ("floating").
  • Spreads are trades which occur between commodity locations and times, as well as intra-market and inter-market.
  • Options give the holder of the option the right but not the obligation to buy or sell a commodity at a particular price for a specific date and location in the future.
  • Options are price risk insurance, and a premium is paid for options contracts.
  • Premiums paid are substantially less than the outright commodity contracts.
  • Option premiums are determined using mathematical models. The most well-known is the Black-Sholes.
  • "Put" options give the buyer a "floor" price, whereas "call" options establish a "ceiling" price for the buyer.
  • Options buyers are only exposed to the cost of the premiums.
  • The seller (writer) of an option assumes all the risk.