Derivatives Course Outline

I. Introduction

A. Basic definitions

1. Futures/forwards

2. Options: puts & calls

3. Derivative securities (general)

B. Basic uses

1. Hedging

2. Speculation

3. Portfolio risk adjustment

C. Order entry/execution

D. Basic strategies

II. Futures

A. Introduction

B. Exchanges & contracts/commodities

C. Mechanics of trading

D. Historical overview

E. Markets, competition, prices, & trading

F. Risk transference & financing

G. Speculation

H. Cash­Futures relationships

I. Primary producers, users of raw materials

J. Markets -- Performance, Regulation, & Development

III. Options -- basic

A. Definitions

1. Put/call (supplementary not complementary -- see conversion)

2. Exercise/strike price

3. Expiration

4. Conversion(s)/reverse conversion(s) ("reversal(s)")

5. Synthetic positions/position equivalents

6. Exercise/assignment

B. Determinants of value

1. Underlying price

2. Strike/exercise price

3. Volatility

4. Interest rate

5. Time/duration

6. Dividend(s) -- equities only

7. Supply & demand

8. Other

IV. Options -- intermediate

A. Theoretical pricing models

1. Black-Scholes European model

2. American options

3. Futures/index/equity/debt

4. Volatility

a. normal distribution

b. mean, standard deviation

c. daily/weekly/monthly

d. log-normal distribution

e. types

(1) future

(2) historical

(3) forecast

(4) implied

(5) seasonal

5. Forecasting/estimating inputs

B. Theoretical outputs

1. delta

2. gamma

3. theta

4. vega

5. rho

V. Options -- advanced

A. Using theoretical values

1. establishing hedges

2. "delta neutral" hedges

3. profit & loss

4. "frictionless" markets

B. Total net positions

1. Changes in determinants of value

2. Spreading

a. volatility/ratio spreads

b. back/front spreads

c. vertical spreads

d. time spreads

e. butterfly spreads

f. boxes/3-ways/"jelly rolls"

C. Other considerations

1. Market forecast(s)/prediction(s)

2. Market "bias"

3. Cash flow consideration

4. Expiration at strike price

5. Use of synthetic positions

6. Early exercise

7. Weakness of models

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Date created: July 11, 1997
Last modified: July 30, 1997
Copyright © 1997, Greg Cramer, O.M.S.
Maintained by: Greg Cramer
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