**Study Session 16**

**Reading 48 – Derivative Markets and Instruments**

– LOS 48a: define a derivative and distinguish between exchange-traded and over-the-counter derivatives

– LOS 48b: contrast forward commitments with contingent claims

– LOS 48c: define forward contracts, futures contracts, options (calls and puts), swaps, and credit derivatives and compare their basic characteristics

– LOS 48d: determine the value at expiration and profit from a long or a short position in a call or put option

– LOS 48e: describe purposes of, and controversies related to derivative markets

– LOS 48f: explain arbitrage and the role it plays in determining prices and promoting market efficiency

**Reading 49 – Basics of Derivative Pricing and Valuation**

– LOS 49a: explain how the concepts of arbitrage, replication, and risk neutrality are used in pricing derivatives

– LOS 49b: distinguish between value and price of forward and futures contracts

– LOS 49c: explain how the value and price of a forward contract are determined at expiration, during the life of the contract, and at initiation

– LOS 49d: describe monetary and nonmonetary benefits and costs associated with holding the underlying asset and explain how they affect the value and price of a forward contract

– LOS 49e: define a forward rate agreement and describe its uses

– LOS 49f: explain why forward and futures prices differ

– LOS 49g: explain how swap contracts are similar to but different from a series of forward contracts

– LOS 49h: distinguish between the value and price of swaps

– LOS 49i: explain how the value of a European option is determined at expiration

– LOS 49j: explain the exercise value, time value, and moneyness of an option

– LOS 49k: identify the factors that determine the value of an option and explain how each factor affects the value of an option

– LOS 49l: explain put–call parity for European options

– LOS 49m: explain put–call–forward parity for European options

– LOS 49n: explain how the value of an option is determined using a one-period binomial model

– LOS 49o: explain under which circumstances the values of European and American options differ

**Past LOS (until 2017) – Risk Management Applications of Option Strategies**

– determine the value at expiration, the profit, maximum profit, maximum loss, breakeven underlying price at expiration, and payoff graph of the strategies of buying and selling calls and puts and determine the potential outcomes for investors using these strategies

– determine the value at expiration, profit, maximum profit, maximum loss, breakeven underlying price at expiration, and payoff graph of a covered call strategy and a protective put strategy, and explain the risk management application of each strategy