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AN INTRODUCTION TO

DERIVATIVE MARKETS CHAP 20


& SECURITIES
A derivative is a financial security with a value that
is reliant upon, or derived from, an underlying asset or
group of assets.

The most common underlying assets include:


STOCKS, BONDS, COMMODITIES, CURRENCIES,
INTEREST RATES & MARKET INDEXES.
FORWARD & FUTURES CHAP 21
CONTRACTS
1. Futures Contract Mechanics
2. Comparing Forward and Futures Contracts
1. Hedging and the Basis

Bt,T = is called the cover basis


St = the Date t spot price
Ft;T = the Date t forward price for a
contract maturing at Date T
2. Understanding Basis Risk

N* = optimal hedge ratio


COV = the covariance of changes in the
spot and forward prices
ρ = the correlation coefficient between
the spot and forward price changes
1. Valuing Forwards and Futures
2. The Relationship between Spot and Forward
Prices
 Interest Rate Forwards and Futures
 Long-Term Interest Rate Futures
 Short-Term Interest Rate Futures
 Stock Index Futures
 Currency Forwards and Futures
OPTION CONTRACTS CHAP 22
 Option Market Conventions
 Price Quotations for
Exchange-Traded Options
The Basic Approach
Improving Forecast Accuracy
The Binomial Option Pricing Model
The Black-Scholes Valuation Model
 Estimating Volatility
 Problems with Black-Scholes Valuation
 Valuing European-Style Put Options
Valuing Options on Dividend-Bearing
Securities
 Valuing American-Style Options
 Other Extensions of the Black-Scholes Model
1. Protective Put Options
2. Covered Call Options
3. Straddles, Strips, and Straps
4. Strangles
5. Chooser Options
6. Spreads
7. Range Forwards
SWAP CONTRACTS,
CONVERTIBLE SECURITIES , CHAP 23
& OTHER EMBEDDED
DERIVATIVES
1.Forward-Based Interest
Rate Contracts
Forward Rate Agreements
 Interest Rate Swaps
2. Option-Based Interest Rate
Contracts
 Caps and Floors
 Collars
 Equity Index-Linked Swaps

Credit-Related Swaps
1. Warrants
N =the current number of outstanding
shares
Nw = the number of new shares
created if the warrants are exercised
VT = the value of the firm before the
warrants are exercised
X = the exercise price
2. Convertible Securities
3. Convertible Preferred Stock
4. Convertible Bonds
OTHER DERIVATIVES
1. Dual Currency Bonds
2. Equity-Index Linked Notes
3. Commodity-Linked Bull and Bear
Bonds
4. Swap-Linked Notes
PROFESSIONAL MONEY
MANAGEMENT, ALTERNATIVE CHAP 24
ASSETS & INSDUSTRY
ETHICS
Investment Strategy
at a
Private Money Management Firm
 Valuing Investment Company Shares
 Closed-End versus Open-End Investment
Companies
 Fund Management Fees
 Investment Company Portfolio Objectives
 Breakdown by Fund Characteristics
 Global Investment Companies
 Mutual Fund Organization and Strategy
1. Hedge Funds
2. Characteristics of a Hedge Fund
3. Hedge Fund Strategies
4. Risk Arbitrage Investing: A Closer Look
5. Hedge Fund Performance
6. Private Equity
1. Regulation in the Asset Management
Industry
2. Standards for Ethical Behavior
3. Examples of Ethical Conflicts
EVALUATION OF CHAP 25
PORTFOLIO PERFORMANCE
TREYNOR RATIO
SHARPE RATIO
JENSEN RATIO
INFORMATION RATIO