FMP 4. Introduction to Derivatives

Learning Objectives

1) Define derivatives, describe the features and uses of derivatives, and compare linear and non-linear derivatives.

2) Describe the specifics of exchange-traded and over-the-counter markets, and evaluate the advantages and disadvantages of each.

3) Differentiate between options, forwards, and futures contracts.

4) Identify and calculate option and forward contract payoffs.

5) Differentiate among the broad categories of traders: hedgers, speculators, and arbitrageurs.

6) Calculate and compare the payoffs from hedging strategies involving forward contracts and options.

7) Calculate and compare the payoffs from speculative strategies involving futures and options.

8) Describe arbitrageurs’ strategy and calculate an arbitrage payoff.

9) Describe some of the risks that can arise from the use of derivatives.