###### Concepts of Arbitrage, Replication and ...

The concepts of arbitrage, replication, and risk neutrality are important to comprehend when... **Read More**

– 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

– 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: calculate a forward price of an asset with zero, positive, or negative net cost of carry;

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

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

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

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

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

– LOS 49j: 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

– 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

– LOS 45a: define a derivative and distinguish between exchange-traded and over-the-counter derivatives

– LOS 45b: contrast forward commitments with contingent claims

– LOS 45c: define forward contracts, futures contracts, options (calls and puts), swaps, and credit derivatives and compare their basic characteristics

– LOS 45d: determine the value at expiration and profit from a long or a short position in a call or put option

– LOS 45e: describe purposes of, and controversies related to derivative markets

– LOS 45f: explain arbitrage and the role it plays in determining prices and promoting market efficiency

-LOS 46b: explain the difference between value and price of forward and futures contracts;

-LOS 46c: calculate a forward price of an asset with zero, positive, or negative net cost of carry;

-LOS 46f: define a forward rate agreement and describe its uses;

-LOS 46g: explain why forward and futures prices differ;

-LOS 46i: explain the difference between value and price of swaps;

-LOS 46j: explain the exercise value, time value, and moneyness of an option;

-LOS 46l: explain put–call parity for European options;

-LOS 46m: explain put–call–forward parity for European options;

-LOS 46n: explain how the value of an option is determined using a one-period binomial model;

-LOS 46o: explain under which circumstances the values of European and American options differ.

LOS a: define a derivative and describe basic features of a derivative instrument

LOS b: describe the basic features of derivative markets, and contrast over-the-counter and exchange-traded derivative markets

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

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

LOS c: contrast forward commitments with contingent claims

LOS a: describe the benefits and risks of derivative instruments

LOS b: compare the use of derivatives among issuers and investors

LOS a: explain how the concepts of arbitrage and replication are used in pricing derivatives

LOS b: explain the difference between the spot and expected future price of an underlying and the cost of carry associated with holding the underlying asset

LOS a: Explain how the value and price of a forward contract are determined at initiation, during the life of the contract, and at expiration

LOS b: Explain how forward rates are determined for an underlying with a term structure and describe their uses

LOS a: compare the value and price of forward and futures contracts

LOS b: explain why forward and futures prices differ

LOS a: describe how swap contracts are similar to but different from a series of forward contracts

LOS b: contrast the value and price of swaps

LOS a: Explain the exercise value, moneyness, and time value of an option

LOS b: Contrast the use of arbitrage and replication concepts in pricing forward commitments and contingent claims

LOS c: Identify the factors that determine the value of an option and describe how each factor affects the value of an option

LOS a: explain put–call parity for European options

LOS b: explain put–call forward parity for European options

LOS a: explain how to value a derivative using a one-period binomial model

LOS b: describe the concept of risk neutrality in derivatives pricing