If the underlying makes a move, the value of the derivative moves with a nearly identical margin. In fact, there is a 1:1 relationship between the derivative and the underlying – explaining why linear derivatives are said to be “delta-one” products. However, the delta itself need not always be equal to 1. Examples of linear derivatives include futures and forwards. A linear derivative is one whose value is directly related to the market price of the underlying variable. What does that mean? Speculators trade in futures, intending to resell these contracts before maturity. They expect the futures price to move in their favor and make a profit when selling the contracts. However, there can be no guarantees that the price will move in their favor, and therefore this trading strategy is also laden with risks. If the price moves against a speculator’s position, they could suffer substantial losses. A forward contract is a non-standardized contract – traded in an over-the-counter market –between two parties that specifies the price and the quantity of an asset to be delivered in the future. That it’s non-standardized implies it cannot be traded on an exchange. Instead, they are traded in the OTC market. One party takes a long position and agrees to buy the underlying asset at a specified price on the specified date, while the other party takes a short position and agrees to sell the asset on that same date at that same price.

Some corporate bonds may have derivatives embedded in them. These derivatives will give the bond issuers and holders the right to repay them or redeem them early/ convert them to shares respectively. For options, speculators only need to part with the option’s price at the onset, often just a few dollars for 100 shares worth of the underlying. However, options have asymmetrical payoffs. Going long on options can bring in significant gains, but losses are limited to the option’s price paid. The asymmetry in the payoff profile allows for limited loss (the premium paid) with unlimited potential gain. Options have been embedded in capital Investment opportunities to give room for expanding or doing away with the project depending on the turn of events.All European options can only be exercised at maturity. On the other hand, American options may be exercised any time between the issue date and expiration. As such, the price of an option is directly proportional to its maturity date. For example, the premium paid for an out-of-the-money option on Apple expiring in one month will be less than the premium paid for an option with the same strike price expiring in one year. o Credit risk and credit derivatives with the key products and key issues being introduced early in the book Speculative trading (regarding futures contracts) refers to the trading of futures contracts without the intention of obtaining the underlying commodity. Thus, speculators basically make bets on the market, unlike hedgers, whose priority is to eliminate exposures. The first half of the course involves the review of the required tools, the setup of the pricing framework, the intuition of the methodology and the application to plain vanilla derivatives. The required technical tools will be explained carefully, allowing students to learn the language and to be able to converse with derivatives professionals. Once the tools are in place, those same tools can then be applied to any derivative. Special emphasis will be put on those derivatives that shape the modern world.

The risk manager can hedge against the foreign exchange risk by buying the call option with a strike price of USD 1.1120. If in six months the exchange rate is more than USD 1.1120, the risk manager will exercise the option, getting the 10 million euros using the exchange rate of USD 1.1120. Alternatively, the risk manager could buy the European put option to sell 10 million euros at an exchange rate of USD 1.1120. If in six months the exchange is less than USD 1.1120, the risk manager exercises the option by selling the received for USD 1.1120. On the other hand, if the exchange is greater than USD 1.1120, the option is not exercised, and the risk manager acquires a favorable exchange rate. Speculators The second half of the course applies those techniques to more advanced topics: exotic derivatives, volatility modelling (including stochastic volatility, local volatility and volatility derivatives such as variance swaps) and interest-rate derivatives.

Speculators

NEW! Available DerivaGem 3.00 software—including to Excel applications, the Options Calculator and the Applications Builder, and a Monte Carlo simulation worksheet:

An investor with a long position in an asset can hedge the exposure by entering into a short futures contract or buying a put option. An investor with a short position in an asset can hedge the exposure by entering into a long futures contract or buying a call option.This program provides a better teaching and learning experience—for you and your students. Here's how: Non-linear derivatives, such as options, have an asymmetrical payoff profile, which is their distinguishing feature. A risk manager in company X (located in the U.S.) knows that his company is due to pay 10 million euros in 6 months, at the exchange rate of USD 1.1120 per euro. How can the risk manager hedge again foreign exchange risk using a call option? The years 1997-2017 saw the exchange-traded market and the OTC markets growing by a factor of 6 and 7.4, respectively. Options, Futures, and Forwards Options

Non-linear derivatives have a constant rate of change in value with respect to changes in the underlying asset. Consider the forward contract on CAD- EUR exchange rate. The spot bid and ask prices per one euro are CAD 1.1080 and CAD 1.1083, respectively. The 6-month bid and ask prices are CAD 1.1120 and CAD 1.1125, respectively. This course covers the concepts and models underlying the modern analysis and pricing of financial derivatives. The philosophy of the course is to first provide firm foundations for understanding derivatives in general.Long exposure in a futures contract means the holder of the position is obliged to buy the underlying instrument at the contract price at expiry. The holder will make a profit if the price of the instrument goes up. However, arbitrage opportunities are normally short-lived. The nature of efficient markets is that market forces will push up the asset’s price in the underpriced market while simultaneously pushing down the asset’s price in the overpriced market. At the end of the day, the asset will be priced equally in both markets. Risks in Derivative Trading Market Risk Bridges the gap between theory and practice—a best-selling college text, and considered “the bible” by practitioners, it provides the latest information in the industry, including: