# Derivatives

The CFA Institute Series

1. Edition March 2022

896 Pages, Hardcover*Wiley & Sons Ltd*

**978-1-119-85057-1**

The complete guide to derivatives, from experts working with CFA Institute

Derivatives is the definitive guide to derivatives and derivative markets. Written by experts working with CFA Institute, this book is an authoritative reference for students and investment professionals interested in the role of derivatives within comprehensive portfolio management. General discussion of the types of derivatives and their characteristics gives way to detailed examination of each market and its contracts, including forwards, futures, options, and swaps, followed by a look at credit derivative markets and their instruments. The companion workbook (sold separately) provides problems and solutions that align with the text and allows students to test their understanding while facilitating deeper internalization of the material.

Derivatives have become essential for effective financial risk management and for creating synthetic exposure to asset classes. This book builds a conceptual framework for grasping derivative fundamentals, with systematic coverage and thorough explanations. Readers will:

* Understand the different types of derivatives and their characteristics

* Delve into the various markets and their associated contracts

* Examine the role of derivatives in portfolio management

* Learn why derivatives are increasingly fundamental to risk management

CFA Institute is the world's premier association for investment professionals, and the governing body for CFA(r) Program, CIPM(r) Program, CFA Institute ESG Investing Certificate, and Investment Foundations(r) Program. Those seeking a deeper understanding of the markets, mechanisms, and use of derivatives will value the level of expertise CFA Institute brings to the discussion, providing a clear, comprehensive resource for students and professionals alike. Whether used alone or in conjunction with the companion workbook, Derivatives offers a complete course in derivatives and their use in investment management.

Preface

Acknowledgments

About the CFA Institute Investment Series

Chapter 1: Derivative Markets and Instruments

Learning Outcomes

* Derivatives: Introduction, Definitions, and Uses

* The Structure of Derivative Markets

* Types of Derivatives: Introduction, Forward Contracts

* Types of Derivatives: Futures

* Types of Derivatives: Swaps

* Contingent Claims: Options

* Contingent Claims: Credit Derivatives

* Types of Derivatives: Asset-Backed Securities and Hybrids

* Derivatives Underlyings

* The Purposes and Benefits of Derivatives

* Criticisms and Misuses of Derivatives

* Elementary Principles of Derivative Pricing

Chapter 2: Basics of Derivative Pricing and Valuation

Learning Outcomes

* Introduction

* Basic Derivative Concepts, Pricing the Underlying

* The Principle of Arbitrage

* Pricing and Valuation of Forward Contracts: Pricing vs. Valuation; Expiration; Initiation

* Pricing and Valuation of Forward Contracts: Between Initiation and Expiration; Forward Rate Agreements

* Pricing and Valuation of Futures Contracts

* Pricing and Valuation of Swap Contracts

* Pricing and Valuation of Options

* Lower Limits for Prices of European Options

* Put-Call Parity, Put-Call-Forward Parity 10.1. Put-Call-Forward Parity

* Binomial Valuation of Options

* American Option Pricing

Summary

Problems

Chapter 3: Pricing and Valuation of Forward Commitments

Learning Outcomes

* Introduction to Pricing and Valuation of Forward Commitments

* Carry Arbitrage

* Pricing Equity Forwards and Futures

* Pricing Fixed-Income Forward and Futures Contracts

* Pricing and Valuing Swap Contracts

* Pricing and Valuing Currency Swap Contracts

* Pricing and Valuing Equity Swap Contracts

Summary

Problems

Chapter 4: Valuation of Contingent Claims

Learning Outcomes

* Introduction and Principles of a No- Arbitrage Approach to Valuation

* Binomial Option Valuation Model

* One- Period Binomial Model

* Binomial Model: Two- Period (Call Options)

* Binomial Model: Two- Period (Put Options)

* Binomial Model: Two- Period (Role of Dividends & Comprehensive Example)

* Interest Rate Options & Multiperiod Model

* Black-Scholes-Merton (BSM) Option Valuation Model, Introduction and Assumptions of the BSM Model

* BSM Model: Components

* BSM Model: Carry Benefits and Applications

* Black Option Valuation Model and European Options on Futures

* Interest Rate Options

* Swaptions

* Option Greeks and Implied Volatility: Delta

* Gamma

* Theta

* Vega

* Rho

* Implied Volatility

Summary

Problems

Chapter 5: Credit Default Swaps

Learning Outcomes

* Introduction

* Basic Definitions and Concepts

* Important Features of CDS Markets and Instruments, Credit and Succession Events, and Settlement Proposals

* Basics of Valuation and Pricing

* Applications of CDS

* Valuation Differences and Basis Trading

Summary

Problems

Chapter 6: Introduction to Commodities and Commodity Derivatives

Learning Outcomes

* Introduction

* Commodity Sectors

* Life Cycle of Commodities

* Valuation of Commodities

* Commodities Futures Markets: Participants

* Commodity Spot and Futures Pricing

* Theories of Futures Returns

* Components of Futures Returns

* Contango, Backwardation, and the Roll Return

* Commodity Swaps

* Commodity Indexes

Summary

References

Problems

Chapter 7: Currency Management: An Introduction

Learning Outcomes

* Introduction

* Review of Foreign Exchange Concepts

* Currency Risk and Portfolio Risk and Return

* Strategic Decisions in Currency Management: Overview

* Strategic Decisions in Currency Management: Spectrum of Currency Risk

* Strategic Decisions in Currency Management: Formulating a Currency Management Program

* Active Currency Management: Based on Economic Fundamentals, Technical Analysis, and the Carry Trade

* Active Currency Management: Based on Volatility Trading

* Currency Management Tools: Forward Contracts, FX Swaps, and Currency Options

* Currency Management Strategies

* Hedging Multiple Foreign Currencies

* Currency Management Tools and Strategies: A Summary

* Currency Management for Emerging Market Currencies

Summary

References

Problems

Chapter 8: Options Strategies

Learning Outcomes

* Introduction

* Position Equivalencies

* Covered Calls and Protective Puts

* Investment Objectives of Protective Puts

* Equivalence to Long Asset/Short Forward Position

* Risk Reduction Using Covered Calls and Protective Puts

* Spreads and Combinations

* Straddle

* Implied Volatility and Volatility Skew

* Investment Objectives and Strategy Selection

* Uses of Options in Portfolio Management

* Hedging an Expected Increase in Equity Market Volatility

Summary

Problems

Chapter 9: Swaps, Forwards, and Futures Strategies

Learning Outcomes

* Managing Interest Rate Risk with Swaps

* Managing Interest Rate Risk with Forwards, Futures, and Fixed- Income Futures

* Managing Currency Exposure

* Managing Equity Risk

* Volatility Derivatives: Futures and Options

* Volatility Derivatives: Variance Swaps

* Using Derivatives to Manage Equity Exposure and Tracking Error

* Using Derivatives in Asset Allocation

* Using Derivatives to Infer Market Expectations

Summary

Problems

Chapter 10: Introduction to Risk Management

Learning Outcomes

* Introduction

* The Risk Management Process

* The Risk Management Framework

* Risk Governance . An Enterprise View

* Risk Tolerance

* Risk Budgeting

* Identification of Risk . Financial and Non- Financial Risk

* Identification of Risk . Interactions Between Risks

* Measuring and Modifying Risk . Drivers and Metrics

* Methods of Risk Modification . Prevention, Avoidance, and Acceptance

* Methods of Risk Modification . Transfer, Shifting, Choosing a Method for Modifying

Summary

Problems

Chapter 11: Measuring and Managing Market Risk

Learning Outcomes

* Introduction

* Estimating VaR

* The Parametric Method of VaR Estimation

* The Historical Simulation Method of VaR Estimation

* The Monte Carlo Simulation Method of VaR Estimation

* Advantages and Limitations of VaR and Extensions of VaR

* Other Key Risk Measures . Sensitivity Risk Measures; Sensitivity Risk Measures

* Scenario Risk Measures

* Sensitivity and Scenario Risk Measures and VaR

* Using Constraints in Market Risk Management

* Applications of Risk Measures

* Pension Funds and Insurers

Summary

References

Problems

Chapter 12: Risk Management for Individuals

Learning Outcomes

* Introduction

* Human Capital, Financial Capital, and Economic Net Worth

* A Framework for Individual Risk Management

* The Individual Balance Sheet

* Individual Risk Exposures

* Life Insurance: Uses, Types, and Elements

* Life Insurance: Pricing, Policy Cost Comparison, and Determining Amount Needed

* Other Types of Insurance

* Annuities: Types, Structure, and Classification

* Annuities: Advantages and Disadvantages of Fixed and Variable Annuities

* Risk Management Implementation: Determining the Optimal Strategy and Case Analysis

* The Effect of Human Capital on Asset Allocation and Risk Reduction

Summary

References

Problems

Chapter 13: Case Study in Risk Management: Private Wealth

Learning Outcomes

* Introduction and Case Background

* Identification and Analysis of Risk Exposures: Early Career Stage

* Risk Management Recommendations: Early Career Stage

* Risk Management Considerations Associated with Home Purchase

* Identification and Analysis of Risk Exposures: Career Development Stage

* Risk Management Recommendations: Career Development Stage

* Identification and Analysis of Risk Exposures: Peak Accumulation Stage

* Assessment of and Recommendations concerning Risk to Retirement

* Identification and Analysis of Retirement Objectives, Assets, and Drawdown Plan: Retirement Stage

* Income and Investment Portfolio Recommendations: Retirement Stage

Summary

Problems

Chapter 14: Integrated Cases in Risk Management: Institutional

Learning Outcomes

* Introduction

* Financial Risks Faced by Institutional Investors

* Environmental and Social Risks Faced by Institutional Investors

References

Glossary

About the Editors and Authors

Index