Calculation Agent
A calculation agent is almost like a referee or mediator who has the important job of determining the value of a derivative. And what the heck is a derivative? It's basically any kind of security that relies on the value of an underlying asset such as a stock, bond, commodity or foreign currency. It could be in the form of a futures contract, interest rate swap or call/put options.
But getting back to the calculation agent, they have to figure out who owes how much and to whom. Just like in a real estate closing, each party can have their own calculation agent or both use the same one. The agent might determine how the derivative will be valued, the exchange rate if it involves foreign currency or the current market value.
You will most likely never come into contact with a calculation agent for simple derivative trading at publicly available market prices. But for more complex deals, the calculation agent (who could also be the seller or a broker) plays a key role. And if one of the parties disagrees with the value the agent comes up with, they can take their case to a "disinterested third party" to make the final decision. Agents are supposed to avoid any conflicts of interest, which could be a problem if they are also the seller.
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Finance: What Is a Call Option?25 Views
finance a la shmoop. what is a call option? option? option, where are you? okay
yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]
is the right to call or buy a security. the concept is easy the math is hard.
you think Coca Cola's poised for a breakout as they go into the new low
calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]
call option for $1. well that call option buys you the right
to then buy coke stock at 55 bucks a share anytime you want in the next
hundred and 20 days. so let's say Coke announces its new sugarless drink flavor
zero it's two weeks later and the stock skyrockets to fifty eight dollars a
share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]
so you buy the stock and you're all in now for fifty five dollars plus one or
fifty six bucks a share and your total value is now fifty eight bucks. well you
could turn around today and sell the bundle that moment, and you'll have
turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]
stock not skyrocketed so quickly well you would have lost everything. still you
lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]
options. as for Coke flavor zero turned out to be nothing more than canned water.
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