FMP 4. Derivatives: LOs

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

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

c) Identify and calculate option and forward contract payoffs.

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

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

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

g) Calculate an arbitrage payoff and describe how arbitrage opportunities are temporary.

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

FMP 5. Exchanges and OTC Markets: LOs

a) Describe how exchanges can be used to alleviate counterparty risk.

b) Explain the developments in clearing that reduce risk.

c) Describe netting and describe a netting process.

d) Describe the implementation of a margining process; explain the determinants of and calculate initial and variation margin requirements.

e) Compare exchange-traded and OTC markets and describe their uses.

f) Identify the classes of derivative securities and explain the risk associated with them.

g) Identify risks associated with OTC markets and explain how these risks can be mitigated.

h) Describe the role of collateralization in the OTC market and compare it to the margining system.

i) Explain the use of special purpose vehicles (SPVs) in the OTC derivatives market.