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After completing this reading, you should be able to:
- Describe the over-the-counter market, distinguish it from trading on an exchange, and evaluate its advantages and disadvantages.
- Differentiate between options, forwards, and futures contracts.
- Identify and calculate option and forward contract payoffs.
- Calculate and compare the payoffs from hedging strategies involving forward contracts and options.
- Calculate and compare the payoffs from speculative strategies involving futures and options.
- Calculate an arbitrage payoff and describe how arbitrage opportunities are temporary.
- Describe some of the risks that can arise from the use of derivatives.
- Differentiate among the broad categories of traders: hedgers, speculators, and arbitrageurs.
