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Lecture

Introduction to Derivatives

In course

FIN-404: Derivatives

This course provides a detailed presentation of the standard models for the valuation and hedging of derivatives products such as European options, American options, forward contracts, futures contract and exotic options. ...

Description

This lecture introduces the basics of derivatives, covering topics such as hedging with options, leveraging positions, bear and bull spreads, straddles, butterfly spreads, piecewise linear payoffs, engineering payoffs, and approximation techniques. It also explores examples of futures contracts, assumptions in trading, contract values, cash & carry trades, and the law of one price. The instructor explains the concept of intermediate cash flows, proportional cash flows, reinvesting strategies, and pricing models for underlying assets. Additionally, the lecture delves into the differences between forward and futures contracts, highlighting the importance of organized exchanges, standardization, liquidity, and marking to market practices.

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Instructor

Julien Hugonnier

Official source

Ontological neighbourhood

Economics

Microeconomics: Financial economics

Business

Finance: Financial risk management

Related concepts (32)

Asset pricing

In financial economics, asset pricing refers to a formal treatment and development of two main pricing principles, outlined below, together with the resultant models. There have been many models developed for different situations, but correspondingly, these stem from either general equilibrium asset pricing or rational asset pricing, the latter corresponding to risk neutral pricing.

Derivative (finance)

In finance, a derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply called the underlying. Derivatives can be used for a number of purposes, including insuring against price movements (hedging), increasing exposure to price movements for speculation, or getting access to otherwise hard-to-trade assets or markets.

Option style

In finance, the style or family of an option is the class into which the option falls, usually defined by the dates on which the option may be exercised. The vast majority of options are either European or American (style) options. These options—as well as others where the payoff is calculated similarly—are referred to as "vanilla options". Options where the payoff is calculated differently are categorized as "exotic options". Exotic options can pose challenging problems in valuation and hedging.

Option (finance)

In finance, an option is a contract which conveys to its owner, the holder, the right, but not the obligation, to buy or sell a specific quantity of an underlying asset or instrument at a specified strike price on or before a specified date, depending on the style of the option. Options are typically acquired by purchase, as a form of compensation, or as part of a complex financial transaction.

Futures contract

In finance, a futures contract (sometimes called futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset transacted is usually a commodity or financial instrument. The predetermined price of the contract is known as the forward price. The specified time in the future when delivery and payment occur is known as the delivery date.

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