Financial Risk Management (FRM) / CFA - Derivatives tutorial

Explore futures, options, swaps, and swaptions, and learn how to calculate forward and futures prices. Develop hedging skills and prepare for CFA exams through practical derivatives insights.

Explore how derivatives, including forward, futures, options, and swaps, are contracts whose value derives from an underlying asset; learn how they hedge risk, enable speculation, and unlock arbitrage.

Explore hedge strategies using put options and futures to manage stock and cattle price risk. Identify producer versus consumer roles and analyze break-even points and option profitability.

Learn how futures are traded on exchanges with standardized contracts, initial and maintenance margins, and mark-to-market settlements, including hedging, delivery or cash settlement, and clearing.

Chapter two presents three futures problems, explaining margins, price moves, and profit/loss for long positions in frozen orange juice futures. It covers margin calls, losses, and net profits.

learn how futures hedges work for consumers and producers, using long and short positions to lock in prices, plus the role of basis risk, forwards versus futures, and delivery timing.

Learn how futures hedges mitigate price risk and basis risk in oil and jet fuel, using long and short hedge strategies, hedging ratios, and rolling contracts.

Compute hedge ratios from correlation and volatility, determine long or short futures positions, and apply hedging strategies to cattle, stock, and beta-adjusted portfolios.

Explore the spectrum of interest rates—from Treasury rates and LIBOR to Fed funds and overnight index swaps—plus continuous and discrete compounding, forward rate agreements, and zero-rate bond pricing.

bootstrap zero rates from bond prices, derive forward rates from zero rates, and interpret the yield curve while pricing forwards and forward rate agreements.

Explains converting rates between continuous, monthly, quarterly, and semiannual compounding, derives forward rates from zero rates, and prices bonds using continuous discounting and present‑value cash flows.

Explore no-arbitrage pricing of forwards and futures, including income, storage costs, and yields, with examples of arbitrage opportunities.

Solve chapter five problems by calculating forward prices and future values under continuous compounding with dividend yields and storage costs, applying arbitrage, discounting, and present-value concepts.

Explore interest rate futures and bond hedging strategies to protect against rising or falling rates, including accrual, pricing conventions, delivery options, and duration-based hedging.

Explore chapter six interest rate futures part two, covering conventions, accrued interest, cash price, settlement with conversion factors, eurodollar futures, and duration hedging basics.

Analyze interest accrual for treasury and corporate bonds using actual/actual and 30/360 day-count conventions. Hone eurodollar futures gains and hedging with treasury futures, including conversion, cheapest-to-deliver, and accrued interest concepts.

Explore how swaps exchange fixed and floating cash flows, including interest rate and currency swaps, with examples on asset and liability conversions, netting, and valuation using risk-free rates.

Chapter seven presents three swap valuation problems, comparing fixed and floating legs, using notional principal, semiannual and quarterly payments, forward rates, and continuous discounting.

Explain securitization, mortgage-backed and asset-backed securities, SPVs, and the creation of senior, mezzanine, and equity tranches. Describe the waterfall, CDOs, and how lax lending and regulation sparked the 2007 crisis.

Explore the mechanics of the option market: call and put options, American and European exercise rights, and intrinsic value across in-the-money, at-the-money, and out-of-the-money scenarios.

Master mechanics of options with practical problems on european puts and calls, profit, break-even, and exercise decisions, plus margin requirements and effects of dividends and stock splits.

Explore how stock option premiums respond to stock price, exercise price, time, volatility, interest rates, and dividends; compare American and European options, and learn put-call parity, bounds, and arbitrage opportunities.

Explore chapter 10 properties of stock options through lower-bound problems for four-month calls and one-month puts on nondividend paying stocks; apply C + P e^-rt = S to price options.

Explore core options trading strategies, including principal-protected notes, covered calls, protective puts, bull call spread, bear spread, butterfly spread, straddle, strangle, strip, and calendar spread strategies with practical examples.

Explore binomial trees to price calls and puts, compare single-stage and two-stage models, cover european and american options, and relate to volatility, risk-free rate, and dividends.

Explores valuing stock options with the Black-Scholes-Merton framework, deriving call and put prices for lognormal stock prices, using volatility, risk-free rate, and time to maturity, including dividends.

Cover employee stock options issued on company stock with fixed strike price and a ten-year duration; vesting period and exercise create new shares, with fair-value expensing, dilution, and backdating concerns.

Learn how dividends affect index and currency options, adjust Black-Scholes and parity formulas for dividend yield, and hedge portfolios with index puts using strike selection.

Explore the options Greeks—delta, gamma, vega, theta, and rho—and learn delta hedging and gamma adjustments within the Black-Scholes framework.

Explore the greeks—delta, gamma, theta, vega—and the roll rate, and learn hedging with stocks, futures, and synthetic options, plus scenario analysis and lessons from the 1987 portfolio insurance crash.

Learn how option Greeks—delta, gamma, vega, theta, and interest-rate sensitivity—drive option prices, and explore bullish/bearish calls and puts with volatility and time decay.

Analyze derivative mishaps to learn how to quantify risk and set limits, with lessons from Barings, Enron, and other losses to guide diversification and scenario analysis.