- This topic has 4 replies, 3 voices, and was last updated Jun-181:07 pm by
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Up0
Do all derivatives have zero value at the beginning of a contract apart from covered call and protective put?
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Up5
The value is determined by the underlying (or derived) asset or security.
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Up4
@wannabe1988
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Up3
Generally exchange traded derivatives do have a zero value at the point of purchase/sale, however OTC derivatives can be traded “off market” and require a transfer of funds from/to a counterparty at the time of initiation.
An “off market” FRA for example could set the fixed rate slightly higher than the theoretical “fair” fixed rate and therefore have an initial negative value to the fixed rate payer and a positive value to the fixed rate receiver. In this case, the fixed rate receiver would pay an initial outflow to the fixed rate payer to compensate for this positive value.
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Up0
Thanks! Just to make sure my understanding is correct, only forward has an initial zero value although it also can be traded off-market with a non-zero initial value. Futures, swaps, protective put and covered call also have non-zero initial value. However, how about ordinary call and put option? do these have non-zero initial value?
Thank you! 🙂
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