The Fundamentals of Derivatives

Training Description

The Fundamentals of Derivatives

Derivatives, often considered by some—like Warren Buffet—as financial weapons of mass destruction, were originally created to hedge various risks, including interest rates, foreign exchange, commodities, and credit.

Origin and History of Derivatives

Historical records show their use in 17th-century Japan when farmers sought to lock in future sales prices for their rice production.

Role and Functioning of Derivatives

While derivatives can be used for pure speculation, they also enhance price formation through continuous arbitrage in financial markets. These instruments are powerful tools for risk transfer, borrowing concepts and terminology from the insurance industry.

Target Audience and Training Objectives

This financial markets training is designed for anyone who wants to understand the role and functioning of derivatives, as well as the key market participants using them for various strategies.

Derivatives Pricing

This training also provides a detailed approach to pricing fixed derivatives (futures, forwards, swaps) and contingent derivatives (options, swaptions).

Training Objectives

• Understand the role and functioning of derivatives.
• Differentiate between fixed derivatives and contingent derivatives.
• Understand the difference between price and value.
• Distinguish between a future and a forward contract.
• Comprehend how options work, including "the Greeks."
• Identify the main uses of derivatives: hedging, speculation, and arbitrage.
• Analyze different strategies involving derivatives.
• Understand the variables that affect the pricing of derivatives.

Target Audience

• Bank treasurers
• Corporate treasurers
• Financial engineers

Training Duration

• 2 days (14 hours)

Training Program

The Fundamentals of Derivatives

I. Role, Characteristics, and Typology of Derivatives

• Hedging vs. Speculation Instruments
• Regulated Market vs. Over-the-Counter (OTC)
• Some Key Figures
• Difference Between Price and Value
• Recent Regulatory Developments
• Typology of Main Derivatives:
• • "Firm" Derivatives
  • "Conditional" Derivatives

Quiz

II. "Firm" Derivatives

• Futures and Forwards
• Swaps
• FRA (Forward Rate Agreements)

Practical Case:

• Use of Firm Derivatives for Hedging and Speculation

III. Conditional Derivatives

• Vanilla Options: Call, Put, Analysis of "Greeks"
• Exotic Options
• Structured Products
• Swaptions

Practical Cases:

• Manipulation of an Option Pricer
• Analysis of a Structured Product

IV. Pricing and Valuation Principles

• Conceptual Framework: No-Arbitrage, Risk-Neutral Probability
• Valuation of Firm Products: Discounting Approach for Futures, Forwards, and Swaps
• Option Pricing: Black-Scholes Model, Binomial Approach, Monte Carlo
• Sensitivities and "Greeks": Delta, Gamma, Vega, Theta, Rho
• Advanced Models: Stochastic Volatility, Pricing of Exotic Options

Practical Cases:

• Simulation of Option Pricing Using a Black-Scholes Pricer
• Impact of Implied Volatility on Option Valuation