Financial Derivatives

Delivery Price
1. The delivery price is the price at which one party agrees to deliver the underlying
commodity and at which the counter-party agrees to accept delivery.
2. The delivery price is defined in a futures contract traded on a registered exchange or
in an over-the-counter forward agreement.
3. The delivery price is set in advance in the contract. It is agreed on the day the futures
or forward contract is entered, not on the day in the future when the commodity is
actually delivered.
4. Delivery price can also refer to a stock's selling price in options contracts.

Forward Price
1. Forward price is the predetermined delivery price for an underlying commodity,
currency, or financial asset as decided by the buyer and the seller of the forward
contract, to be paid at a predetermined date in the future.
2. At the inception of a forward contract, the forward price makes the value of the
contract zero, but changes in the price of the underlying will cause the forward to
take on a positive or negative value.
Settlement Price
The settlement price may also refer to the final price an underlying asset achieves with
reference to options contracts to determine whether they are in-the-money (ITM) or out-of-
the-money (OTM) at expiration and what their payoffs ought to be. Settlement prices may
also be used to compute the net-asset value (NAV) of mutual funds or ETFs on a daily basis.
Strike Price
1. Strike price is the price at which a derivative contract can be exercised. The term is
mostly used to describe stock and index options. For call options, the strike price is
where the security can be bought by the option buyer up till the expiration date. For
put options, the strike price is the price at which shares can be sold by the option
buyer.
2. The price difference between the underlying stock price and the strike price is a key
determinant in how valuable the option is. For a call option, if the strike price is above
the underlying stock price, the option is out of the money (OTM). In this case, the
option doesn't have intrinsic value, but it may still have value based on volatility and
time until expiration as either of these two factors could put the option in the money in
the future. If the underlying stock is above the strike price, the option will have
intrinsic value and be in the money.
Out of The Money (OTM) and In the Money (ITM)
Out of the money (OTM) is term used to describe a call option with a strike price that is
higher than the market price of the underlying asset, or a put option with a strike price that is
lower than the market price of the underlying asset. An out of the money option has no
intrinsic value, but only possesses extrinsic or time value.
In the money (ITM) means that a call option's strike price is below the market price of the
underlying asset, or that the strike price of a put option is above the market price of the
underlying asset. An option that is in the money has intrinsic value, where as an option that
is out of the money (OTM) does not.
Being ITM does not mean the trader is necessarily making a profit on the trade, because an
option costs money to buy. ITM just means the option is worth exercising.

Convenience Yield
1. A convenience yield is the benefit or premium associated with holding an underlying
product or physical good, rather than the associated derivative security or contract.
2. Sometimes, as the result of irregular market movements such as an inverted market,
the holding of an underlying good or security may become more profitable than
owning the contract or derivative instrument due to its relative scarcity versus high
demand.
3. An example would be purchasing physical bales of wheat rather than wheat future
contracts. If there is a sudden drought, and the demand for wheat increases, the
difference between the first purchase price of the wheat versus the price after the
shock would be the convenience yield.

Linear Derivative
An option-related instrument or fixed-income security which features low or no convexity,
i.e., its sensitivity changes with the passage of time or with market movement. For instance,
swaps are, by nature, linear or quasi-linear derivatives because the second order derivative
with respect to the underlying price is equal or close to zero. More specifically, the hedge
ratio of a swap is not supposed to change in response to movements in the underlying asset.
Other time-dependent linear derivatives include forward contracts and forward rate
agreements (FRAs).