Overview
An effective way to understand a given derivative is plot the value of the derivative at maturity versus the underlying strike price.
Payoff of an Asset
The value of an asset to a trader at a given time in the future is given by
{% S-P %}
where
- {% S %} is the price of the asset at the future date
- {% P %} is the purchase price of the asset today
The payoff diagram is a simple 45 degree line. Assuming that the trader buys a given asset at $100.
Derivative Payoff Diagrams
The following are a set of common derivative structures.