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Derivatives Essentials – An Instrodution to Fowards, Futures, Options and Swaps

Free Download Ebook: Derivatives Essentials – An Instrodution to Fowards, Futures, Options and Swaps

There are five parts to this book:

■ Part One: Introduction to Forwards, Futures, and Options (Chap-
ters 1–3)

■ Part Two: Pricing and Valuation (Chapters 4–7)
■ Part Three: The Greeks (Chapters 8–10)
■ Part Four: Trading Strategies (Chapters 11–13)
■ Part Five: Swaps (Chapters 14–15)

Part One introduces forwards, futures, and options. Forwards and futures are agreements that obligate counterparties to transact in the future. Options are agreements that provide one of the counterparties a right, and not an obligation, to transact in the future.

In Part One you will learn about the key characteristics of forwards, futures, and options and each position’s cash flows, payoffs, and P&L (profit and loss). You will also learn why forwards, futures, and options are described as zero-sum games and the concepts of moneyness and counterparty credit risk.

Part Two explores pricing and valuation of forwards and options.

In Part Two you will learn to distinguish between price and value and explore models of price and value for each position, including the Black-Scholes and binomial option pricing models. You will also learn about the assumptions that these models make, risk-neutral valuation, and why the models represent price and value. You will also be introduced to the concepts of implied volatility and volatility surfaces.

Part Three explores the “Greeks,” which are measures of product and strategy sensitivity to change in the determinants of their value.

In Part Three you will learn how to define, calculate, and interpret the Greeks and why they can be inaccurate. You will also develop a deep understanding of how the Greeks can be used to understand and describe sensitivity; why a given Greek will be positive, negative, or zero; and why its magnitude can change.

Part Four explores trading strategies. In Part Four you will learn how to describe and implement price and volatility trading strategies, create synthetic positions, and implement protective, yield enhancing, and spread trading strategies. The trading strategies that will be explored in

Part Four include straddles, strangles, protective puts, covered calls, collars, bull spreads, bear spreads, risk reversals, butterfly spreads, and condor spreads, among others. You will also learn advanced concepts related to moneyness and put-call parity.

Part Five introduces swaps. A swap is an exchange of cash flows between two counterparties over a number of periods of time. In an interest rate swap the counterparties exchange fixed and floating interest rates. In a credit default swap periodic payments of spread are exchanged for a payment contingent on a credit event. In a cross-currency swap the counterparties exchange interest payments in different currencies.

In Part Five you will learn about the key characteristics of these swaps, their sensitivities and cash flows, and how they can be used to transform exposures.

Most of the chapters in this book build on the material in previous chapters. It is therefore important that you truly understand each chapter before advancing to the next. To allow you to test your understanding, there are more than 650 Knowledge check questions throughout the book, the solutions to which are provided in the appendix. The Knowledge check questions can be used to ensure absorption of the material both when you learn the material for the first time and also when you review.

I hope this book provides you with a deep understanding of derivative securities and an enjoyable and valuable learning experience!

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