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CFA Level 1 - Derivatives
Rating: 4.6 out of 5(11 ratings)
207 students

CFA Level 1 - Derivatives

To-the-point explanations with comprehensive coverage using examples
Created byKuldeep Sharma
Last updated 5/2024
English

What you'll learn

  • Derivative Market and Instruments
  • Pricing Forward Contracts
  • Pricing Futures
  • Pricing Options
  • Put-Call Parity
  • Understand Arbitrage
  • Valuation using Binomial Model

Course content

1 section • 14 lectures • 2h 31m total length

  • Meaning of Derivatives3:57

    Derivatives are contracts deriving value from an underlying asset, such as stocks, bonds, commodities, or even rates and weather, transforming payoffs and enabling risk management through hedging and short selling.

  • Types and Structure of derivatives6:28

    Identify two main derivative types—forward commitments and contingent claims—illustrated by forwards, futures, swaps, and options, and contrast exchange-based standardized markets with margin and clearing to otc, customizable deals.

  • Forward Contracts6:10

    Explore forward contracts, the simplest derivatives, and learn how deliverable and cash-settled forwards hedge price risk, define long and short positions, calculate payoffs, and use offsetting.

  • Futures and Margin Money12:11

    Explore futures contracts, their daily mark-to-market settlement, and how initial and maintenance margins drive margin calls to maintain contract value.

  • Open Interest and Forward vs Futures10:51

    Explain price limit bands, open interest as a market mood indicator, and compare forwards and futures across trading, settlement, margins, and regulation.

  • Swaps9:36

    Learn why swaps are the most widely used derivatives globally, covering fixed vs floating rates, currency and equity swaps, and how banks and corporations use them to hedge risk.

  • Options14:06

    Explore options as contingent claims with strike price and premium, comparing American vs European exercise, call vs put rights, and long vs short positions and moneyness.

  • Credit Derivatives8:59

    Explore credit derivatives, including total return swaps, credit spread options, credit linked notes, credit default swaps, hybrids, asset backed securities, and arbitrage insights.

  • Risk Aversion & Pricing the underlying10:35

    Explore how risk aversion and risk neutral perspectives drive derivative pricing, covering risk-free rate, risk premium, present value, contango, backwardation, and convenience yield.

  • Arbitrage & Valuation of Forwards16:26

    Explore arbitrage, cash-and-carry and replication strategies to price forwards, understand no-arbitrage conditions, and evaluate forward value through cost of carry and risk-free rates.

  • Forward Rate Agreement9:21

    Describe forward rate agreements, where the long borrows and pays a fixed rate while the short investor receives it, with a notional principal not exchanged, cash-settled, and LIBOR as underlying.

  • Futures Pricing5:07

    Examine futures pricing with daily mark-to-market settlement, margin balances, and payments versus forwards' single settlement at expiry. Rising rates favor futures due to reinvestment of daily gains.

  • Swaps pricing12:41

    Learn how swap pricing sets a zero value at initiation for fixed versus floating payments, based on notional principal. Analyze payoffs using fixed rate minus floating rate and LIBOR references.

  • Options pricing24:56

    Explore option pricing fundamentals, including intrinsic value, time value, call and put moneyness with spot and exercise prices, expiry, and put-call parity for arbitrage opportunities.

Requirements

  • Have interest in the CFA Program
  • Curiosity to learn about the Derivative instruments

Description

Derivatives are financial instruments that derive their value from the performance of an underlying asset, such as a stock, bond, commodity, currency, or interest rate. Derivatives can be used for hedging, speculation, or arbitrage purposes. In this course, you will learn about the types, characteristics, pricing, and valuation of different derivative instruments, such as forwards, futures, options, swaps, and credit derivatives. You will also learn about the benefits and risks of using derivatives, as well as the role of arbitrage in determining prices and promoting market efficiency.

This course is designed to prepare you for the CFA Level 1 exam on derivatives. The course covers the following topics:

  • Derivative Markets and Instruments: You will learn how to define a derivative and distinguish between exchange-traded and over-the-counter derivatives. You will also learn how to contrast forward commitments with contingent claims and describe the purposes and controversies of derivative markets.

  • Basics of Derivative Pricing and Valuation: You will learn how to use the concepts of arbitrage, replication, and risk neutrality to price derivatives. You will also learn how to calculate and value forward contracts, futures contracts, swaps, options, and credit derivatives. You will also learn how to apply put-call parity and the binomial model to value options.

  • Risk Management Applications of Option Strategies: You will learn how to determine the value at expiration, profit, maximum profit, maximum loss, breakeven price, and payoff graph of various option strategies. You will also learn how to use covered calls and protective puts for risk management purposes.

The course is based on the CFA Level 1 syllabus for derivatives. The course includes lectures, readings, quizzes, and practice questions to help you master the concepts and prepare for the exam. By the end of this course, you will have a solid understanding of derivatives and how they work in the financial markets.

Who this course is for:

  • CFA Level 1 candidates appearing in 2024

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