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The price of financial derivatives is influenced by several factors, which can vary depending on the type of derivative, whether it's an option, future, swap, and the underlying asset, whether it's stocks, bonds, commodities, currencies.
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Here are some key factors that typically affect the price of financial derivatives.
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The underlying asset price.
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The price of an underlying asset has a direct impact on the value of derivatives.
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For example, the price of a call option on a stock will increase as the stock price rises.
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Volatility measures the degree of variation of the price of the underlying asset.
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Higher volatility generally increases the price of options and other derivatives, as there is a greater likelihood of an underlying asset moving significantly in value.
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For options and other time -sensitive derivatives, the amount of time remaining until expiration is a critical factor.
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Generally, the longer the time until expiration, the higher the derivatives price, assuming other factors remain constant.
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Interest rates affect the pricing of derivatives through their impact on the cost of carry and discounting future cash flows.
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Higher interest rates tend to decrease the prices of options and futures contracts...