Introduction to Financial Derivatives

Forward contracts are customizable over-the-counter derivatives to buy or sell an asset at a specified price on a future date, with higher default risk due to lack of centralized clearinghouse.

Learn how forwards work: at expiration, the difference between the spot price and the forward price determines who pays whom, with delivery or cash settlement options.

Explore the risks in forward contracts within the derivatives market, including regulatory absence, liquidity constraints, and default risk that affect buyers, sellers, and financial institutions.

Compare forwards and futures by highlighting over-the-counter private contracts with customization and a single delivery date at maturity, versus exchange-traded standardized contracts with daily settlement and multiple delivery dates.

Use forward rate agreements, over-the-counter contracts that fix borrowing costs by cash-settling net difference between the contract rate and the reference rate on a notional amount, with no principal exchange.

Introduction to futures explains standardized contracts obligating buyers to purchase and sellers to sell at a predetermined price on a delivery date, detailing quality and quantity, via a futures exchange.

Explore how futures contracts standardize by detailing the underlying asset, expiration, delivery and settlement terms, quantity, currency, and even details like wheat variety, quality, and protein content.

Explore the types of orders in the futures market, including market orders, limit orders, stop orders, stop loss, buy stop, sell stop, stop limit, and market if touched.

Explore how margins enable leveraged buying of securities, including initial futures margin, maintenance margin, and margin calls, to manage credit risk and liquidity in futures markets.

Understand how margins and daily settlements keep futures markets stable by marking accounts to the settlement price and distributing gains and losses.

Identify who speculators are in futures markets and how individual traders, prop shops, portfolio managers, hedge funds, and market makers profit while providing liquidity by accepting risk.

Futures hedging lets companies lock in favorable prices and reduce uncertainty by offsetting price exposure, including cross hedging; short hedges cover owned assets and long hedges cover future purchases.

Options are derivative contracts, including calls and puts, granting buyers the right to buy or sell an asset at a strike price before expiration for a premium.

Explore options contract specifications, covering the underlying asset, rights to buy or sell, quantity, class, strike price, expiration, and exercise type (american or european).

Explore call options and their upside like futures, where rising prices let the buyer exercise to buy the underlying at the strike price before expiration, with american and european exercise.

The put option gives the buyer the right to sell 100 shares at the strike price by expiration, and the seller must buy them as the buyer pays the premium.

Exercise conditions differ: American options can be exercised anytime up to expiration, while European options only on expiration; European options are easiest to price and traded over the counter.

learn how options expire, requiring exercise or lapse. expiration occurs on the saturday after the third friday, with automatic exercise for in-the-money options unless opted out.

Define strike price as the option's exercise price and show how calls enable buying and puts enable selling before expiration, with profit per share equal to market price minus strike.

Understand options margins as cash deposits that collateralize writers’ obligations; selling calls or puts requires funds to buy or deliver the underlying, while buyers pay the premium with no margin.

Explain intrinsic value as the difference between underlying price and strike price, and time value as the premium above intrinsic value reflecting uncertainty and discounting, including in-the-money, at-the-money, and out-of-the-money.

Learn about swaps as over-the-counter derivatives where plain vanilla swaps exchange cash flows, one variable and one fixed, with notional principle and customizable settlement dates, plus counterparty default risk.