Knowledge Base
Derivatives
Derivative instruments, their pricing through arbitrage and replication, and their use by issuers and investors for hedging and speculation.
Sub-themes
Valuing a Derivative Using a One-Period Binomial Model
Risk-neutral valuation and the one-period binomial framework for pricing derivatives.
Option Replication Using Put–Call Parity
Put-call parity and put-call forward parity for European options, and how they enable synthetic position construction.
Pricing and Valuation of Options
Option value components — exercise value, moneyness, and time value — and the factors that determine an option's price.
Pricing and Valuation of Interest Rates and Other Swaps
Swap pricing and valuation, and the conceptual link between swap contracts and a series of forward agreements.
Pricing and Valuation of Futures Contracts
How futures prices relate to forward prices, and why marking to market creates pricing differences between the two.
Pricing and Valuation of Forward Contracts and for an Underlying with Varying Maturities
Determining forward contract value and price at initiation, during life, and at expiration, including interest rate forwards.
Arbitrage, Replication, and the Cost of Carry in Pricing Derivatives
No-arbitrage pricing, replication portfolios, and cost of carry as foundations for derivative valuation.
Derivative Benefits, Risks, and Issuer and Investor Uses
Benefits and risks of derivative instruments, and how issuers and investors use them differently.
Forward Commitment and Contingent Claim Features and Instruments
Forwards, futures, swaps, options, and credit derivatives: their defining features and how forward commitments differ from contingent claims.
Derivative Instrument and Derivative Market Features
What defines a derivative, and how over-the-counter and exchange-traded derivative markets are organized.