Korea Derivatives Investment Advisor key terms

A standardized contract traded on an exchange that obligates both parties to buy or sell an underlying asset at a fixed price on a specified future date, with daily settlement of gains and losses through a clearing house.

A contract granting the buyer the right, but not the obligation, to buy or sell an underlying asset at a stated price on or before an expiry date, in exchange for a premium paid to the seller.

A privately negotiated agreement in which two parties exchange cash flow streams, such as fixed for floating interest payments or different currencies, over a defined period according to a contractual formula.

The reference item whose price or value determines the payoff of a derivative, such as an equity index, interest rate, currency, commodity, or credit event.

A derivative contract traded bilaterally outside an organized exchange, with terms negotiated privately, exposing each party to the other's credit risk rather than to a central clearing house.

An entity that interposes itself between trade counterparties, becoming buyer to every seller and seller to every buyer, and guarantees performance through margin collection and default funds.

Collateral deposited by a derivative trader to secure future obligations, comprising initial margin posted at trade inception and maintenance margin that must be restored when the account balance falls below the required level.

A demand from a broker or clearing member for additional collateral when a client's account equity drops below the maintenance margin requirement, which must be met within a stated deadline to avoid forced liquidation.

The end-of-day practice of revaluing open futures positions at the settlement price and crediting or debiting the resulting gains and losses to margin accounts, preventing losses from accumulating unnoticed.

The official price fixed by an exchange at the close of each trading session, used to mark positions to market and to compute margin obligations and cash settlement amounts.

The difference between the spot price of an underlying asset and the price of a related futures contract, which converges toward zero as the contract approaches expiry.

A market condition in which futures prices exceed the spot price, typically reflecting storage costs, financing costs, and convenience yield, so the basis is negative for the near contract.

A market condition in which futures prices trade below the spot price, often arising from strong immediate demand or supply tightness, causing the futures curve to slope downward.

The fixed price at which an option holder may buy or sell the underlying asset, set in the contract and used to determine whether the option finishes in, at, or out of the money.

The price an option buyer pays and the seller receives for granting the contractual right, composed of intrinsic value plus time value and influenced by volatility, time to expiry, and interest rates.

The amount an option would be worth if exercised immediately at the current underlying price, equal to the excess of the underlying price over the strike for calls, or the reverse for puts, floored at zero.

The portion of an option premium exceeding intrinsic value, reflecting the chance that favorable price movement before expiry will increase the option's payoff, and which erodes as expiry approaches.

The status of an option whose strike price is favorable relative to the current underlying price, giving it positive intrinsic value: a call with strike below the underlying, or a put with strike above it.

The status of an option with no intrinsic value because its strike is unfavorable relative to the current underlying price, so the premium consists entirely of time value.

The volatility level that, when entered into an option pricing model, reproduces the option's observed market price, serving as a market consensus forecast of future price fluctuation.

A statistical measure of past price fluctuations of an underlying asset, usually the annualized standard deviation of returns over a chosen lookback window, used as a benchmark for implied volatility.

A sensitivity measure showing how much an option's price changes for a one-unit change in the underlying price, and also approximating the equivalent number of underlying units the option behaves like.

The rate at which an option's delta changes as the underlying price moves, indicating how unstable a delta hedge is and peaking for at-the-money options close to expiry.

The sensitivity of an option's price to the passage of time, showing the value lost per day as expiry nears, all else equal, and typically negative for long option positions.

The sensitivity of an option's price to a change in implied volatility, measuring how much value is gained or lost when the market's volatility expectation shifts by one percentage point.

A no-arbitrage relationship stating that a call plus a discounted strike equals a put plus the underlying, linking call and put prices with the same strike and expiry.

Trading that exploits price discrepancies between related instruments or markets to lock in riskless profit, whose activity enforces fair pricing relationships such as put-call parity.

Taking an offsetting derivative position to reduce exposure to adverse price, rate, or currency movements in an existing portfolio or business cash flow, prioritizing risk reduction over return.

The proportion of an exposure covered by offsetting derivative positions, often computed from delta for options, determining how much of the underlying risk is neutralized.

Taking derivative positions to profit from anticipated price movements without an offsetting underlying exposure, accepting higher risk in exchange for potential gains and providing market liquidity.

The amplification of exposure achieved by posting a fraction of a position's notional value as margin, magnifying both gains and losses relative to the capital committed.

A position combining options or futures of the same type but different strikes or expiries, designed to limit cost and risk while expressing a specific view on direction or volatility.

Buying or selling a call and a put with the same strike and expiry; the long version profits from large moves in either direction, while the short version profits from low volatility.

Adjusting a delta-neutral option position to offset changes in delta as the underlying moves, keeping the hedge effective when large price swings are expected.

The obligation of a financial investment firm to ensure a recommended derivative product matches the client's investment objective, risk tolerance, financial capacity, and experience before soliciting or selling it.

A documented record of a client's investment purpose, risk appetite, financial situation, and derivative trading experience, used to judge suitability and refreshed periodically or when circumstances change.

The requirement to clearly explain a derivative's structure, risks, fees, and potential losses to a client before a contract is concluded, with written confirmation where prescribed by regulation.

A statutory window after signing certain high-risk derivative contracts during which the investor may withdraw the order without penalty, giving time to reconsider the decision.

The closing of a client's derivative positions by the broker when margin requirements are not met or risk limits are breached, preventing further losses and protecting the firm's exposure.

A situation where a firm's or adviser's own interest, such as commissions or proprietary positions, may improperly influence advice given to a client, requiring disclosure and management.

Settlement of a derivative at expiry by paying the net cash value of the position rather than delivering the underlying asset, common for index and many OTC contracts.