Learning Sessions – Derivatives

Study Session 17

Reading 56 – Derivative Markets and Instruments

LOS 56a: define a derivative and distinguish between exchange-traded and over-the-counter derivatives
LOS 56b: contrast forward commitments with contingent claims
LOS 56c: define forward contracts, futures contracts, options (calls and puts), swaps, and credit derivatives and compare their basic characteristics
LOS 56d: describe purposes of, and controversies related to derivative markets
LOS 56e: explain arbitrage and the role it plays in determining prices and promoting market efficiency

Reading 57 – Basics of Derivative Pricing and Valuation

LOS 57a: explain how the concepts of arbitrage, replication, and risk neutrality are used in pricing derivatives
LOS 57b: distinguish between value and price of forward and futures contracts
LOS 57c: explain how the value and price of a forward contract are determined at expiration, during the life of the contract, and at initiation
LOS 57d: 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 57e: define a forward rate agreement and describe its uses
LOS 57f: explain why forward and futures prices differ
LOS 57g: explain how swap contracts are similar to but different from a series of forward contracts
LOS 57h: distinguish between the value and price of swaps
LOS 57i: explain how the value of a European option is determined at expiration
LOS 57j: explain the exercise value, time value, and moneyness of an option
LOS 57k: identify the factors that determine the value of an option and explain how each factor affects the value of an option
LOS 57l: explain put–call parity for European options
LOS 57m: explain put–call–forward parity for European options
LOS 57n: explain how the value of an option is determined using a one-period binomial model
LOS 57o: 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

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