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1. Hedging is betting the other way, meaning against yourself. Example: I bet on red, but just in

case i will also buy an option to bet on black, so that when the dice is JUST about to roll (in finance that
works) I will see what result is the most likely, and if it is black, I will exercise that option on betting black
and I won't lose so much money. Not precisely but something like that.
Speculation is the mother of all evil. Imagine that you are utility company (you provide general
population with electricity), and there are a couple of power stations that are your allies. So what you will do
is ASK some of the power stations to switch their production to 50%, so there is less electricity on the
market. Less electricity means higher prices. Thus you will make supernormal profits. You think thats
impossible in real life? Check the company called Enron.
Arbitrage is the opposite of speculation. Its a perfectly legal way to make money. It happens when
securities (whether it is an option or a futures contract or a government bond, or currency) have different
prices at different markets (tones of reasons for that). So you have the opportunity to buy product A at 90
cents say in Japan, and then sell this same product somewhere in USA for 1 dollar. In modern world all
arbitrage is usually very small and happens rarely because companies take advantage of that REALLY
quickly.

2. DEFINITION of 'Convergence'
A movement in the price of a futures contract toward the price of the underlying cash commodity.
At the start, the contract price is higher because of the time value.

3
4. DEFINITION of 'Put Option' An option contract giving the owner the right, but not the
obligation, to sell a specified amount of an underlying security at a specified price within a
specified time. This is the opposite of a call option, which gives the holder the right to buy
shares.
5. An options strategy whereby an investor holds a long position in an asset and
writes (sells) call options on that same asset in an attempt to generate increased
income from the asset. This is often employed when an investor has a short-term
neutral view on the asset and for this reason hold the asset long and simultaneously
have a short position via the option to generate income from the option premium.
6.
7. For call options, this means the stock price is above the strike price. For call
options, this means the stock price is below the strike price. For put options, this
means the stock price is above the strike price.

8. DEFINITION of 'Hedge Ratio' 1. A ratio comparing the value of a position protected via a
hedge with the size of the entire position itself. 2. A ratio comparing the value of futures
contracts purchased or sold to the value of the cash commodity being hedged.
9. The realized volatility of a financial instrument over a given time period. Generally,
this measure is calculated by determining the average deviation from the average

price of a financial instrument in the given time period. Standard deviation is the
most common but not the only way to calculate historical volatility.
10.. 'Margin Call' A broker's demand on an investor using margin to deposit additional
money or securities so that the margin account is brought up to the minimum maintenance
margin.

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11.
12.(a)A situation where an investor has to take a long position in futures contracts in
order to hedge against future price volatility. A long hedge is beneficial for a
company that knows it has to purchase an asset in the future and wants to lock in
the purchase price. A long hedge can also be used to hedge against a short position
that has already been taken by the investor.
An investment strategy that is focused on mitigating a risk that has already been
taken. The "short" portion of the term refers to the act of shorting a security, usually
a derivatives contract, that hedges against potential losses in an investment that is
held long.
(b) Fundamentally, forward and futures contracts have the same function: both types
of contracts allow people to buy or sell a specific type of asset at a specific time at a
given price.
However, it is in the specific details that these contracts differ. First of all, futures
contracts are exchange-traded and, therefore, are standardized contracts. Forward
contracts, on the other hand, are private agreements between two parties and are
not as rigid in their stated terms and conditions. Because forward contracts are
private agreements, there is always a chance that a party may default on its side of
the agreement. Futures contracts have clearing houses that guarantee the
transactions, which drastically lowers the probability of default to almost never.
13. Commodity derivatives are investment tools that allow investors to profit from certain items without
possessing them. This type of investing dates back to 1848 when the Chicago Board of Trade was established.
Initially, the idea behind commodity derivatives was to provide a means of risk protection for farmers. They
could promise to sell crops in the future for a pre-arranged price
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Systematic Risk - Systematic risk influences a large number of assets. A

significant political event, for example, could affect several of the assets in

your portfolio. It is virtually impossible to protect yourself against this type of

risk.

Unsystematic Risk - Unsystematic risk is sometimes referred to as "specific

risk". This kind of risk affects a very small number of assets. An example is
news that affects a specific stock such as a sudden strike by employees.
Diversification is the only way to protect yourself from unsystematic risk. (We
will discuss diversification later in this tutorial).
Now that we've determined the fundamental types of risk, let's look at more
specific types of risk, particularly when we talk about stocks and bonds.

Credit or Default Risk - Credit risk is the risk that a company or individual
will be unable to pay the contractual interest or principal on its debt
obligations. This type of risk is of particular concern to investors who hold
bonds in their portfolios. Government bonds, especially those issued by the
federal government, have the least amount of default risk and the lowest
returns, while corporate bonds tend to have the highest amount of default risk
but also higher interest rates. Bonds with a lower chance of default are
considered to be investment grade, while bonds with higher chances are
considered to be junk bonds. Bond rating services, such as Moody's, allows
investors to determine which bonds are investment-grade, and which bonds
are junk. (To read more, see Junk Bonds: Everything You Need To Know,
What Is A Corporate Credit Rating and Corporate Bonds: An
Introduction To Credit Risk.)

Country Risk - Country risk refers to the risk that a country won't be able to
honor its financial commitments. When a country defaults on its obligations,
this can harm the performance of all other financial instruments in that
country as well as other countries it has relations with. Country risk applies to
stocks, bonds, mutual funds, options and futures that are issued within a
particular country. This type of risk is most often seen in emerging markets or
countries that have a severe deficit. (For related reading, see What Is An
Emerging Market Economy?)

Foreign-Exchange Risk - When investing in foreign countries you must

consider the fact that currency exchange rates can change the price of the
asset as well. Foreign-exchange risk applies to all financial instruments that
are in a currency other than your domestic currency. As an example, if you are

a resident of America and invest in some Canadian stock in Canadian dollars,

even if the share value appreciates, you may lose money if the Canadian
dollar depreciates in relation to the American dollar.

Interest Rate Risk - Interest rate risk is the risk that an investment's value
will change as a result of a change in interest rates. This risk affects the value
of bonds more directly than stocks. (To learn more, read How Interest Rates
Affect The Stock Market.)

Political Risk - Political risk represents the financial risk that a country's
government will suddenly change its policies. This is a major reason why
developing countries lack foreign investment.

Market Risk - This is the most familiar of all risks. Also referred to as
volatility, market risk is the the day-to-day fluctuations in a stock's price.
Market risk applies mainly to stocks and options. As a whole, stocks tend to
perform well during a bull market and poorly during a bear market - volatility
is not so much a cause but an effect of certain market forces. Volatility is a
measure of risk because it refers to the behavior, or "temperament", of your
investment rather than the reason for this behavior. Because market
movement is the reason why people can make money from stocks, volatility is
essential for returns, and the more unstable the investment the more chance
there is that it will experience a dramatic change in either direction.