Derivatives

In this section

• Chapter 1: Introduction to Derivatives
  • Definition and Characteristics of Derivatives
    Explore the essential characteristics and definitions of derivatives, including underlying assets, payoff structures, risk considerations, and real-world applications.
  • Forward Commitments vs. Contingent Claims
    Delve into the key differences between forward commitments and contingent claims, exploring payoffs, risk exposures, and practical strategies for each type of derivative instrument.
  • Derivative Markets and Participants
    Explore how derivative markets function, the roles played by hedgers, speculators, arbitrageurs, and dealers, and learn how diverse participants and market venues create liquidity and depth in modern derivative trading.
  • Exchange-Traded vs. Over-the-Counter Derivatives
    Compare and contrast exchange-traded with over-the-counter derivatives, focusing on their structures, risk profiles, regulatory frameworks, and practical applications.
  • Role of Clearinghouses and Regulatory Environment
    Explore how clearinghouses serve as the backbone of derivatives markets and the evolving global regulatory landscape aimed at reducing systemic risk.
  • Classification of Underlying Assets
    Explore the different asset classes underlying derivatives—equity, fixed income, commodities, currencies, and more—along with practical examples, diagrams, and exam-oriented insights.
  • Distinguishing Hedgers, Speculators, and Arbitrageurs
    Understanding the distinct roles and motivations driving hedgers, speculators, and arbitrageurs in derivatives markets, along with practical examples, regulatory implications, and best practices.
  • Historical Milestones in Derivative Markets
    Explore the evolution of derivatives from ancient Babylon to modern ESG and crypto instruments, examining major breakthroughs and ongoing regulatory reforms.
  • Conventions in Quoting Derivative Prices
    Explore various conventions, from equity option premiums to interest rate swaps, and learn how derivative quotes vary by market. Understand tick sizes, bid–ask spreads, and tips to avoid pitfalls.
  • Global vs. Regional Derivative Markets
    Explore how global derivative exchanges compare to regional ones in terms of products, trading hours, regulatory frameworks, and clearing processes. Learn how macroeconomic and political events ripple through interconnected financial markets worldwide.
  • Weather, Energy, and Carbon Emissions Derivatives
    Explore how weather, energy, and carbon emissions derivatives help manage climate-driven risks, price volatility, and regulatory compliance in modern financial markets.
  • Automated Trading and High-Frequency Trading Environments
    Explore how automated trading reshapes market liquidity, risk, and regulatory oversight, focusing on high-frequency practices in derivatives markets.
  • LIBOR Transition and Risk-Free Reference Rates
    Explore the transition from LIBOR to risk-free reference rates, the reasons behind the shift, and how it impacts derivative valuation, hedging, and overall market practices.
  • Technological Innovations in Exchange Operations
    Explore how cutting-edge technologies shape modern derivative exchanges, from blockchain settlements to AI-driven analytics, with a focus on real-world applications, cybersecurity, and compliance.
  • Digital Asset Derivatives (Cryptocurrencies and Tokenized Assets)
    Explore the fundamentals of digital asset derivatives, including cryptocurrencies and tokenized assets, focusing on market structure, regulatory nuances, and practical risk considerations.
  • Peer-to-Peer Derivative Platforms
    Explore how direct, decentralized markets match counterparties, manage collateral, and address regulatory concerns in P2P derivative trading.
  • Market Microstructure and Liquidity Effects on Derivative Trading
    Explore how trading mechanisms, order flow, and liquidity dynamics shape pricing and execution in derivative markets.
  • Interoperability Among Global Clearinghouses
    In-depth exploration of CCP interoperability, covering cross-border clearing, margin coordination, systemic risk, and regulatory frameworks for global derivatives markets.
  • Security Token Offerings and Fractionalization of Real Assets
    Explore how Security Token Offerings and fractionalized assets transform traditional finance, enhance liquidity, and open new derivative markets.
  • Cross-Border Regulatory Harmonization
    Learn how global coordination efforts reduce compliance burdens and streamline cross-border derivative transactions through regulatory equivalence, capital rule alignment, and harmonized reporting obligations.
  • Exchange-Traded Notes (ETNs)
    Deep dive into Exchange-Traded Notes (ETNs), highlighting their structure, credit risk, trading mechanisms, and practical examples to illustrate how ETNs might fit into a derivatives-savvy investor’s toolkit.
• Chapter 2: Forward and Futures Contracts
  • Forward Contracts: Structure, Payoffs, and Settlement
    Explore the essential mechanics, payoff structures, and settlement features of forward contracts while learning how they integrate with advanced portfolio management goals.
  • Futures Contracts: Marking to Market and Margins
    A thorough exploration of daily settlement mechanics, margin requirements, and risk management controls within futures trading.
  • Forward vs. Futures: Key Distinctions
    Compare the defining features of forward and futures contracts, exploring differences in standardization, daily margining, market liquidity, and counterparty risk.
  • Margining, Collateral, and Settlement
    Explore how margining, collateral, and settlement processes ensure the integrity of futures contracts, including real-world examples and best practices
  • Index and Currency Futures
    Explore the mechanics, applications, and nuances of index and currency futures, including contract specifications, hedging strategies, pricing, and best practices for portfolio managers.
  • Commodity, Interest Rate, and Equity Futures
    Discover the key principles, real-world workflows, and strategic uses of commodity, interest rate, and equity futures within a dynamic market environment.
  • Physical vs. Cash Settlement
    Explore the key differences between physically delivered and cash-settled futures and forwards, including practical examples, operational considerations, and exam-focused insights for CFA Level I candidates.
  • Forward Rate Agreements (FRAs)
    A deep dive into FRAs, their cash-settlement structure, valuation, and role in hedging or speculating on future interest rates.
  • Calendar Spreads and Interdelivery Spreads
    Explore how calendar and interdelivery spreads function in futures markets, including their structure, risk dynamics, seasonality influences, and practical applications for hedgers and speculators.
  • Clearing House Variation and Initial Margin Calculations
    Explore how clearinghouses use margining systems, including SPAN, to manage risk exposures with daily variation margin and initial margin requirements in futures trading.
  • Exchange for Physical (EFP) Transactions
    Learn how EFPs allow private, off-exchange swaps of futures for underlying physical assets, helping market participants efficiently manage hedging and rollovers.
  • Algorithmic Execution in Futures Markets
    A comprehensive exploration of automated trading strategies, including high-frequency trading and risk controls, for optimizing execution in futures markets.
  • Spread Trading in Futures Markets
    Explore spread trading in futures markets, covering intermarket, interexchange, and commodity–product spreads. Learn about margin offsets, real-world applications, and methods to manage volatility and risk effectively.
  • Cross-Margining Among Different Futures Exchanges
    Explore how cross-margining agreements among futures exchanges can optimize capital efficiency, reduce margin requirements, and enhance systemic resilience in derivatives markets.
  • Microstructure of the Futures Market
    An in-depth exploration of how orders are placed, matched, and executed in the futures market, featuring real-world insights into central limit order books, liquidity impacts, bid-ask spreads, and slippage.
  • Tail Risk in Futures Trading
    Explore the nature of extreme market moves, gap risk, and how to manage unexpected large losses in futures trading.
  • Portfolio Margining Approaches for Futures Traders
    A detailed exploration of portfolio margining for futures traders, covering risk-based margin methodologies, correlation offsets, dynamic calculations, regulatory considerations, and real-world examples.
  • Basis Risk in Futures Hedging
    Learn how basis risk in futures hedging arises, why it matters, and how to manage it effectively by selecting highly correlated instruments and closely monitoring changing spot-futures price dynamics.
• Chapter 3: Swaps
  • Swaps as a Series of Forward Contracts
    Explore how plain vanilla interest rate swaps can be viewed as a strip of forward contracts, including valuation, net settlement, credit risk mitigation, and forward start swaps.
  • Interest Rate Swaps
    Explore the mechanics, valuation, and applications of plain vanilla and other interest rate swaps, including hedging strategies, market conventions, and the LIBOR transition.
  • Currency Swaps
    Explore the fundamentals and applications of currency swaps, including their structure, valuation, and practical uses for hedging and risk management in cross-border transactions.
  • Equity and Commodity Swaps
    A comprehensive overview of how equity and commodity swaps are structured, how they function, and why they are used in modern financial markets.
  • Valuation of Swaps at Initiation and During the Contract
    Learn how to evaluate interest rate, currency, and commodity swaps at inception when their fair value is zero, and discover practical approaches to marking them to market during their lifespan.
  • Swap Termination and Novation
    Learn how swaps can be terminated, transferred, or offset before maturity, with a focus on negotiation, market value implications, and the novation process.
  • Interest Rate Caps, Floors, and Swaptions
    Explore how interest rate caps, floors, and swaptions shape interest rate risk management, from basic payoffs to advanced portfolio applications for CFA Level III candidates.
  • Freight and Commodity Swaps
    Explore how freight and commodity swaps help firms manage shipping rate volatility and commodity price risk, examining key structures, market participants, valuation approaches, and real-world hedging strategies.
  • Asset Swaps and Applications
    In-depth exploration of asset swaps, their mechanics, and practical applications in fixed income portfolio management.
  • Weather and Catastrophe Swaps
    Learn how weather and catastrophe swaps function as vital risk management tools for industries exposed to climate-related events, exploring triggers, contract structures, pricing, valuation, and real-world applications.
  • Political Risk Swaps
    Dive into the structure, valuation, and practical applications of political risk swaps, and explore how they offer protection against unexpected sovereign or geopolitical events.
  • Inflation Swaps
    Explore the mechanics, valuation methods, practical applications, and risk considerations of inflation swaps in modern financial markets.
  • Intra-Curve and Inter-Curve Swap Spreads
    Explore how intra-curve and inter-curve swap spreads arise, why they matter, and how traders use them in yield curve strategies.
  • Multi-Lateral Swap Compression Techniques
    Explore how multi-lateral swap compression eliminates offsetting positions, reduces capital requirements, and streamlines operational processes within the modern swaps market.
  • Forward Start and Accreting Swaps
    Discover how forward start swaps and accreting swaps help manage future interest rate exposures and growing notional requirements in evolving market landscapes.
  • Futurization of Swaps and Swap Futures
    Learn how traditional OTC swaps are transformed into exchange-traded swap futures, improving transparency, reducing counterparty risk, and simplifying margin requirements.
  • Funded vs. Unfunded Swap Structures
    Explore key differences, mechanics, and real-world applications of funded and unfunded swap structures in modern derivatives markets.
• Chapter 4: Options and Contingent Claims
  • Call and Put Options: Definitions and Payoffs
    Explore the foundational concepts of call and put options, their payoff structures, and learn practical examples and best practices to manage option-related strategies.
  • Intrinsic Value, Moneyness, and Time Value
    Comprehensive exploration of the definitions, mechanics, and practical applications of intrinsic value, moneyness, and time value for call and put options, with examples, diagrams, and exam-oriented insights.
  • European vs. American Options
    Explore the key differences between European and American options, the pricing models used, and practical examples of early exercise considerations for both calls and puts.
  • Covered Calls and Protective Puts
    Explore the mechanics, risk–reward profiles, and practical uses of covered calls and protective puts. Learn how these popular option strategies can enhance income, hedge downside risk, and shape portfolio outcomes.
  • Option Strategies and Payoff Diagrams
    Explore various option strategies, their payoff diagrams, and practical considerations for real-world investing and risk management. Learn how to construct, evaluate, and visualize call and put-based strategies—from bullish to bearish to volatility plays—and gain insights to tackle exam-style scenarios confidently.
  • Exotic Options (Binary, Barrier, Asian)
    Explore the fundamentals, payoffs, valuation, and applications of Binary, Barrier, and Asian Options, complemented by real-world use cases and exam-focused insights.
  • Exchange Options and Compound Options
    Explore the mechanics, payoffs, and practical applications of exchange options and compound options within derivatives markets. Learn about Margrabe’s formula, Geske’s work on compound derivatives, key hedging strategies, and real-world use cases for corporate finance and risk management.
  • Volatility Trading with Options
    A comprehensive exploration of how option traders profit from changes in implied and realized volatility, including key strategies such as straddles, strangles, and the use of volatility cones.
  • Greek-Based Hedging Strategies
    A thorough exploration of Greek-based hedging strategies in options, including Delta, Gamma, Vega, Theta, Rho, and multi-Greek dynamic hedging with case studies, examples, and advanced discussions.
  • Lookback, Shout, and Cliquet Options
    Explore the mechanics, payoffs, and practical applications of Lookback, Shout, and Cliquet options. Understand how path dependency and advanced models like Monte Carlo can help in structuring and valuing these exotic derivatives.
  • Chooser and Rainbow Options
    Understand the flexibility of Chooser Options and the multi-asset complexity of Rainbow Options, including practical hedging applications, pricing methods, and real-world examples.
  • Employee Stock Options
    A comprehensive look at Employee Stock Options (ESOs), their valuation, vesting schedules, and the accounting standards driving their recognition and expenses.
  • Index and Basket Options
    An in-depth exploration of index and basket options, covering fundamentals, payoffs, valuation, and real-world applications for hedging and speculation.
  • Structured Warrants and Warrants vs. Options
    Explore the mechanics and distinctions of structured warrants, traditional warrants, and exchange-traded options. Understand how dilution, exercise triggers, and issuer-specific features influence valuation and risk for both corporate and structured warrants.
  • Real Option Approaches in Corporate Decision-Making
    Explore how real options—expansion, abandonment, and timing—enhance capital budgeting analysis by incorporating managerial flexibility and strategic value into corporate investments.
  • Spread Options on Commodity Price Differences
    Explore how spread options derive their value from the price difference between two underlying assets, focusing on commodity spreads like crack spreads in energy markets.
  • Volatility Targeting Strategies Using Options
    Learn how to systematically manage and adjust portfolio volatility through options-based strategies, exploring practical approaches like variance swaps, tail-risk hedging, risk parity, and more.
• Chapter 5: Credit Derivatives
  • Basics of Credit Default Swaps
    An in-depth exploration of Credit Default Swaps, their mechanics, pricing, and key risk management applications.
  • Single-Name, Index, and Basket Swaps
    Explore the essential features, mechanics, and risk management of Single-Name, Index, and Basket CDS, complete with real-world examples and interactive diagrams.
  • Total Return Swaps and Credit-Linked Notes
    Explore how Total Return Swaps (TRSs) and Credit-Linked Notes (CLNs) provide synthetic credit exposure, regulatory capital relief, and unique risk transfer opportunities in the world of credit derivatives.
  • Uses and Risks of Credit Derivatives
    Explore the practical applications, hedging benefits, speculative strategies, and core risks of credit derivatives like credit default swaps, focusing on how and why institutions use them.
  • Credit Events and Settlement Mechanisms
    Explore how credit events are defined under ISDA provisions, and examine the mechanisms by which credit derivative contracts—especially CDS—settle once a credit event is triggered.
  • Credit Spread Options
    Learn how credit spread options provide investors with a targeted way to hedge or speculate on credit spread movements, including key concepts, payoff structures, valuation considerations, and practical applications in real-world portfolios.
  • Credit Derivatives in Emerging Markets
    Discover how credit derivatives in emerging markets offer unique opportunities and challenges for sovereign and corporate debt exposure, with insights into liquidity, risk management, and practical trading considerations.
  • Correlation and Risk in Credit Portfolios
    Explore how default correlation shapes the risk profile of multi-name credit derivatives and structured products, and discover practical modeling techniques for portfolio management.
  • Synthetic CDO Structures
    Discover how credit risk is packaged, transferred, and leveraged in synthetic CDOs using credit default swaps, exploring tranching, risk mitigation, and lessons from the 2008 crisis.
  • Credit Valuation Adjustment (CVA) for Credit Derivatives
    A comprehensive exploration of CVA for credit derivatives, focusing on default probabilities, exposure, and recovery, along with practical cases, best practices, and exam tips for CFA® 2025 Level I candidates.
  • Regulatory Capital Requirements for Credit Derivatives
    In-depth exploration of Basel III guidelines and risk-weighted assets for credit derivative exposures, focusing on capital adequacy, CRM, and CVA charges.
  • CDS Index Tranches
    Discover how CDS index tranches partition credit risk, explore attachment and detachment points, and understand correlation-driven pricing in this comprehensive guide for CFA candidates.
  • CDS on Asset-Backed Securities
    Discover how market participants utilize Credit Default Swaps on Asset-Backed Securities for hedging and exposure to structured finance tranches.
  • Counterparty Exposure in CDS Trading
    Explore how bilateral OTC structures, collateral management, and clearing mechanisms mitigate credit default swap counterparty risks.
  • Use of Credit Derivatives in Securitization
    Explore how credit derivatives facilitate synthetic securitizations, enhance balance sheet management, and create tailored credit exposures in modern financial markets.
• Chapter 6: Derivative Benefits, Risks, and Uses
  • Risk Management and Hedging
    Comprehensive exploration of derivatives in risk management and hedging, including instruments, strategies, and examples for both seasoned learners and beginners.
  • Speculation and Leverage
    Explore how derivatives enable speculative trading, the mechanics of using leverage, critical risk management considerations, and how prudent speculation can enhance overall market liquidity and efficiency.
  • Derivative-Related Risks
    Explore the various risks inherent in derivative instruments, including market risk, counterparty credit risk, liquidity risk, funding risk, operational risk, legal risk, and model risk, and learn best practices for managing these exposures in a multi-asset portfolio.
  • Counterparty Risk in OTC Markets
    Explore the nuances of bilateral credit exposure in OTC derivatives markets, including netting agreements, wrong-way risk, and best practices for mitigating default risk.
  • Uses of Derivatives by Issuers and Investors
    An in-depth exploration of how different market participants—including corporate issuers, institutional investors, and insurance companies—utilize derivatives to manage risks, engineer custom exposures, and enhance returns.
  • Operational, Legal, and Liquidity Risks
    Explore core operational, legal, and liquidity risks faced by derivatives market participants, including settlement failures, contract enforceability, and liquidity constraints during market stress.
  • Regulatory Considerations for Risk Management
    An in-depth exploration of how post-crisis regulations like Dodd-Frank, EMIR, and MiFID II shape derivative risk management, focusing on mandatory clearing, position limits, reporting obligations, cross-border challenges, and enforcement actions.
  • Tax Implications of Derivative Transactions
    Learn how gains and losses on derivatives are taxed, including capital vs. ordinary income distinctions, the 60/40 rule, wash sale regulations, cross-border considerations, and constructive sales.
  • Collateralization and Funding Costs
    Explore how collateral and funding costs shape derivative transactions, including initial vs. variation margin, rehypothecation, and optimization strategies.
  • ESG Considerations and Sustainability Risk Hedging
    Discover the essentials of ESG-linked derivatives, including green swaps, carbon allowances, and climate risk hedging, and learn how to integrate sustainability principles into modern derivative strategies.
  • Case Studies of Derivative Disasters
    Explore major derivative blowups—Barings, LTCM, Société Générale, and Metallgesellschaft—examining how risky strategies, unauthorized trading, and inadequate controls led to catastrophic outcomes.
  • Hedge Accounting Considerations
    Explore the core principles, real-world applications, and testing methods of hedge accounting under IFRS 9 and ASC 815, focusing on fair value, cash flow, and net investment hedges.
  • Reporting and Disclosure of Derivative Positions
    Explore how firms report and disclose derivative holdings, including financial statement footnotes, regulatory filings, fair value hierarchy classifications, and risk metrics such as VaR.
  • Internal Controls for Derivative Operations
    Discover how robust internal controls in derivative operations safeguard organizations from unfettered risk, conflicts of interest, and accounting errors.
  • Cybersecurity Risks in Derivative Markets
    Explore how hacking, phishing, and technological vulnerabilities can disrupt derivative markets, and learn best practices to protect data and trading infrastructures.
  • Role of Third-Party Custodians in Collateral Management
    An in-depth exploration of how third-party custodians help reduce settlement risk, streamline tri-party repo arrangements, and ensure collateral eligibility in derivatives markets.
  • Uncleared Margin Requirements for OTC Derivatives
    Learn how regulators introduced and implemented margin rules for non-centrally cleared derivative transactions, including operational challenges, SIMM methodology, and best practices for risk mitigation.
  • Post-Trade Processing, Settlement, and Collateral Optimization
    Explore the intricate processes and tools involved in post-trade workflows, focusing on affirmation, settlement, collateral optimization, and best practices in automation.
  • Risk Parity Strategies and Derivatives
    Explore how leveraging low-volatility assets with derivatives can balance your portfolio’s risk contributions, along with real-world examples, potential pitfalls, and best practices.
  • Combinations and Overlays in Portfolio Management
    Learn how overlay strategies, duration overlays, currency overlays, and portable alpha can dynamically reshape portfolio exposures and enhance returns.
  • Real-Time Risk Management and Intraday Margin Calls
    A detailed exploration of real-time risk controls, automated intraday margin processes, and dynamic hedging strategies in volatile derivative markets.
  • Cross-Asset Volatility and Correlation Trading
    Explore key techniques for managing and profiting from volatility and correlation across multiple asset classes, leveraging derivatives such as variance swaps, VIX futures, and correlation swaps.
• Chapter 7: Arbitrage, Replication, and Cost of Carry
  • Principles of No-Arbitrage and the Law of One Price
    An advanced yet slightly informal exploration of no-arbitrage conditions and the law of one price, highlighting their significance in modern derivatives pricing, market efficiency, and arbitrage trading.
  • Replicating Payoffs with Derivatives
    Learn how to replicate derivative payoffs using underlying assets and risk-free bonds to eliminate mispricing, with practical insights into dynamic hedging, binomial models, and real-world constraints.
  • Cost of Carry Model for Pricing
    In-depth exploration of the cost of carry model for pricing derivatives, focusing on forward and futures fair value, net carry costs, and arbitrage opportunities.
  • Cash-and-Carry and Reverse Cash-and-Carry Strategies
    Explore the mechanics of cash-and-carry and reverse cash-and-carry arbitrage in futures markets, including practical step-by-step examples, risk-free profit analysis, and real-world considerations affecting these trades.
  • Mechanics of Arbitrage in Practice
    Explore real-world arbitrage implementation, margin accounts, short-selling logistics, electronic trading, prime brokerage, and how transaction costs plus settlement risks may complicate theoretically risk-free strategies.
  • Practical Limitations to Arbitrage and Market Frictions
    Explore how real-world constraints, from bid–ask spreads to short-sale bans, limit arbitrage opportunities, emphasizing the impact of market frictions and regulations in derivative markets.
  • Multi-Asset Arbitrage Strategies
    Explore how traders detect and exploit cross-asset mispricings through relative value techniques, correlation analyses, and cross-hedging methods.
  • Lease Rate Arbitrage
    Explore lease rate arbitrage mechanics, focusing on precious metals, cost of carry, and opportunities driven by mispriced forward contracts and lease rates.
  • Index Arbitrage in Equity Futures
    Explore the mechanics and strategies behind exploiting mispricing between equity index futures and their underlying stocks, including cost-of-carry, program trading, and automated execution.
  • Conversion and Reversal Option Arbitrage
    Explore how conversion and reversal strategies exploit mispricings in the options market, leveraging put–call parity to generate near risk-free profits.
  • Synthetic Positions in Derivative Arbitrage
    Learn how to replicate or replace derivative payoffs through synthetic positions, exploring the intricacies of arbitrage strategies in derivative markets, payoff replication, and potential market frictions.
  • Pairs Trading as a Form of Arbitrage
    An in-depth exploration of pairs trading, a relative-value strategy for exploiting mispricings between correlated assets through long–short combinations.
  • Mispricing Measures and Price Discovery
    Comprehensive exploration of how arbitrage and real-time market dynamics drive price discovery and eliminate mispricing in derivative markets.
  • Arbitrage in Crypto Futures and Perpetual Swap Markets
    Explore how no-arbitrage principles apply in crypto futures and perpetual swaps, learn cross-exchange strategies, and navigate funding rate imbalances in high-volatility digital asset markets.
  • Triangular Arbitrage in Currency Derivative Markets
    Learn how mismatched currency exchange rates can create risk-free arbitrage opportunities across spot and forward contracts, while discovering key mechanics, best practices, and exam insights for CFA candidates.
• Chapter 8: Pricing and Valuation of Forwards and Futures
  • Valuation of Forward Contracts at Initiation, During the Life, and at Expiry
    Learn how forward contracts are valued at inception, during the contract life, and at maturity—core insights for CFA® Level I Derivatives mastery.
  • Determining Forward Prices for Various Underlyings
    A comprehensive capstone-level exploration of forward pricing for different asset classes, highlighting cost-of-carry, dividends, storage costs, convenience yields, currency interest differentials, and forward rate agreements.
  • Relationship between Spot, Forward, and Futures Prices
    Explore the intricate connections between spot, forward, and futures prices under no-arbitrage conditions, learn how daily mark-to-market mechanisms influence these relationships, and understand the impact of interest rate volatility on futures pricing.
  • Impact of Storage Costs and Convenience Yields
    Explore how storage costs and convenience yields influence forward and futures pricing, shaping market structures such as contango and backwardation in commodity markets.
  • Convergence and Delivery
    Explore how futures prices align with underlying spot prices at expiry, the mechanics of physical and cash settlement, and the importance of delivery protocols in maintaining arbitrage-free markets.
  • Hedging Strategies Using Forwards and Futures
    Learn how to manage price risk through short and long hedging strategies, rolling hedges, and understanding basis risk and contract details.
  • Contango, Backwardation, and Term Structure of Futures Prices
    Exploring the fundamentals and real-world implications of contango and backwardation in futures markets, as well as the role of term structure across different maturities.
  • Deliverable vs. Cash-Settled Contracts
    A comprehensive exploration of physical versus cash settlement in futures, examining their distinctions, pricing, risks, and real-world applications.
  • Term Structure of Interest Rates in Forward Pricing
    Learn how the shape and dynamics of the yield curve affect forward and futures valuation, with practical examples for FRAs, bond futures, and more.
  • Volatility Index Futures (VIX and Others)
    A comprehensive exploration of volatility index futures, such as the famed VIX, focusing on how they measure implied volatility, key contract specifications, practical hedging uses, and advanced applications in portfolio management.
  • Seasonality Adjustments in Commodity Pricing
    Discover how seasonal factors influence both spot and futures prices in commodity markets, learn how to model such patterns, and explore practical hedging and risk management techniques.
  • Basis Trading in Commodity Markets
    Explore the nuances of basis trading in commodity markets, including how changes in local cash and futures prices affect hedgers and speculators, key influences on basis movements, and best practices for managing basis risk.
  • Machine Learning Approaches to Seasonal Commodity Pricing
    Explore how advanced machine learning techniques like random forests and neural networks can uncover seasonal patterns and predict price movements in commodity markets.
  • Impact of Circuit Breakers on Derivative Trading
    Explore how circuit breakers and trading halts shape derivative markets, manage volatility, and affect hedgers and speculators.
  • Cross-Exchange Arbitrage Strategies
    Discover how traders exploit price discrepancies across multiple exchanges in futures markets, the role of high-frequency trading, and the key considerations for implementing and managing cross-exchange arbitrage strategies successfully.
  • Zero-Cost Collar Strategies in Commodity Markets
    Explore how zero-cost collar strategies help commodity producers hedge downside price risk while capping upside gains, using practical examples and real-world insights.
  • Commodity Index Futures
    Explore how commodity index futures provide a broad market exposure across energy, metals, and agriculture, including roll schedules, collateral yields, and index methodologies.
  • Negative or Zero-Bound Interest Rate Environments
    Explore how negative or zero-bound interest rates affect the pricing and valuation of forwards and futures, highlighting cost-of-carry, arbitrage relationships, and real-world applications.
• Chapter 9: Pricing and Valuation of Swaps
  • Swaps as Portfolios of Forward Contracts
    Explore how swaps can be viewed as collections of forward rate agreements, including discounting cash flows, decomposing interest rate swaps, and key hedging insights.
  • Valuing Interest Rate Swaps and Swap Rates
    Explore the essential mechanics for valuing interest rate swaps, including fixed and floating leg methodologies, calculating swap rates, and understanding day count conventions.
  • Valuing Currency and Equity Swaps
    Explore the mechanics, practical valuation techniques, and risk management strategies for currency and equity swaps, including real-world hedging applications and exam-focused insights.
  • Impact of Notional Principal, Netting, and Collateral
    Discover how notional principal, netting, and collateral interplay to manage credit risk, reduce exposure, and influence swap valuation and pricing in derivatives markets.
  • Factors Affecting Swap Spreads
    Explore how credit risk, liquidity, supply-demand dynamics, regulation, and short-term funding costs jointly shape the difference between swap rates and government bond yields.
  • Terminating or Unwinding a Swap
    Comprehensive exploration of swap termination methods—close-outs, novation, and cash settlement—covering valuation, market shifts, legal considerations, and potential pitfalls.
  • Cross-Currency Basis Swaps
    A comprehensive exploration of cross-currency basis swaps, covering their structure, valuation, practical applications, and risk management considerations for global portfolio managers.
  • Structured Swaps (Amortizing, Accreting)
    Explore the fundamentals and valuation nuances of structured swaps with amortizing and accreting notionals, and learn how they are used for targeted hedging and cash flow matching.
  • Spread Lock Agreements
    An in-depth exploration of spread lock agreements in swaps, focusing on hedging spread risk, their valuation, and practical applications.
  • Butterfly, Roller-Coaster, and Other Complex Swap Structures
    Explore advanced interest rate swap variations, including butterfly swaps and roller-coaster swaps, to manage yield curve shaping risks through time-varying notional schedules.
  • Central Clearing Requirements for OTC Swaps
    Explore how regulatory frameworks mandate the central clearing of standardized OTC swaps to reduce counterparty risk, highlighting CCP roles, margin requirements, default management practices, and real-world examples.
  • Market Value vs. Credit Value Adjustments in Swaps
    Explore how credit risk can influence the fair valuation of swaps, balancing market value and credit value adjustments to arrive at a more realistic pricing framework.
  • Derivative Valuation Adjustments: XVA (CVA, DVA, FVA, KVA)
    An in-depth guide to how XVA frameworks shape modern derivative valuation, focusing on credit, debit, funding, and capital adjustments.
  • Swap Execution Facilities and Post-Trade Transparency
    Delve into the regulatory-driven shift toward Swap Execution Facilities (SEFs) and the heightened post-trade transparency they bring, examining their impact on market structure, price discovery, and compliance in swap markets.
  • Equity Repo Swaps and Stock-Lending Swaps
    A comprehensive exploration of equity repo swaps and stock-lending swaps, focusing on their structure, mechanics, valuation, and practical uses in modern equity financing and hedging strategies.
  • Cost-of-Funds Index Swaps
    Explore the structure, mechanics, and valuation techniques of Cost-of-Funds Index (COFI) swaps, including real-world hedging scenarios, best practices, and exam-focused insights.
• Chapter 10: Pricing and Valuation of Options
  • Determinants of Option Value
    Explore the core factors that shape an option’s worth, including intrinsic value, time value, volatility, interest rates, and dividends, with practical examples and diagrams.
  • Put–Call Parity and Put–Call Forward Parity
    Explore the theory, formulas, and applications of Put–Call Parity and Put–Call Forward Parity, foundational no-arbitrage relationships in option pricing.
  • Binomial Option Pricing Model (One-Period)
    Learn how to value options using the one-period binomial model by computing up and down outcomes, determining risk-neutral probabilities, and discounting the expected payoff. Explore hedged portfolios, real-world scenarios, and exam-focused insights.
  • Risk-Neutral Valuation
    An in-depth exploration of the arbitrage-free, risk-neutral framework for option pricing, its foundational principles, and practical applications in binomial and continuous models.
  • Black–Scholes–Merton Model Assumptions
    Explore the critical theoretical underpinnings of the Black–Scholes–Merton model, its key assumptions, and how real-world markets often deviate from this foundational framework for pricing options.
  • Dividends in Option Pricing
    Explore how dividends affect option valuation, covering discrete and continuous dividend models, early exercise considerations for American calls, and practical forecasting challenges.
  • Introduction to the Black–Scholes–Merton Model
    Learn the fundamentals of the Black–Scholes–Merton Model, its origins, formulas, and practical applications in options pricing and risk management.
  • Option Sensitivities (Greeks)
    Explore how Greeks quantify an option’s sensitivity to price changes, volatility, time decay, and interest rates—all core tools for advanced derivatives risk management.
  • Volatility Smiles and the Implied Volatility Surface
    Explore how implied volatility varies across strikes and maturities, leading to volatility skews, smiles, and surfaces in practical options pricing. Understand how these patterns arise, why standard assumptions fall short, and how practitioners account for them in real-world markets.
  • Variance and Volatility Swaps
    A deep dive into the mechanics, valuation, and practical uses of variance and volatility swaps, highlighting advanced strategies and portfolio applications for CFA candidates.
  • Monte Carlo Methods for Complex Option Pricing
    Discover how Monte Carlo simulations can be used to model, price, and manage complex path-dependent options, supported by variance reduction methods, real-world examples, and practical exam tips.
  • Multi-Period Binomial Trees for American Options
    A comprehensive guide on using multi-period binomial trees to value American-style options, focusing on early exercise decisions and practical applications.
  • Finite Difference Methods in Option Pricing
    Learn how finite difference methods tackle the Black–Scholes PDE by discretizing time and price into a grid. Explore explicit, implicit, and Crank–Nicolson schemes, boundary conditions, implementation tips, advantages, and pitfalls.
  • Early Exercise Considerations in American-Style Options
    Insights into the mechanics, valuation, and practical implications of early exercise for American-style calls and puts, focusing on dividend-paying assets, deep-in-the-money puts, and the trade-off between intrinsic value and extrinsic value.
  • Static Replication Approaches for Barrier Options
    Learn how to replicate barrier option payoffs using vanilla options in a static framework. This section explores the intricacies of constructing knock-in and knock-out payoffs, managing path dependence, and overcoming replication challenges.
  • Machine Learning Approaches in Option Pricing
    Dive into how data-driven models, including neural networks and gradient boosting, refine option pricing by uncovering complex market relationships.
  • Options on Implied Volatility
    Discover the fundamentals, pricing challenges, and hedging strategies for options on market-implied volatility, with a focus on instruments like VIX options.
  • Jump-Diffusion Models in Option Pricing
    Explore how jump-diffusion models extend standard option pricing frameworks to account for sudden price moves and market discontinuities.
  • Stochastic Volatility and Heston Model
    In-depth exploration of the Heston Model for Stochastic Volatility and advanced derivative pricing under uncertain volatility dynamics.