Notes: risk management in corporation financial decision making

Futures/forward contract

Spot price: real time market price

Call/put options:

Allow the option to expire/elapse

When the risk is price rise:
buy the right to buy = buy a call = long call
sell the right to buy = sell a call = short call

When the risk is price fall:
buy the right to sell = buy a put = long put
sell the right to sell = sell a put = short put

Exercise price:  the price at which to set up a cap or floor

In-the-money; at-the-money; out-of-the-money

Six factors impacting the value of call/put options:
Four of them impact the intrinsic value:
1. Exercise price: negative to the call value; positive to the put value
2. Asset value: positive; negative
3. Interest rate: p; n
4. Dividends (e.g. if the traded underlying asset is a share): n; p

Two of them impact the time value:
5. Volatility
6. Expiry time

European / American style options: whether you cannot or can exercise before the expiry date.