Copyright

Ch 22: Derivatives in Finance Overview

About This Chapter

For an overview of derivatives in finance, check out this series of simple and entertaining lessons. The lessons, along with the chapter's self-assessment quizzes, are designed to improve your derivatives knowledge for upcoming exams, homework assignments, class projects or any other academic need.

Derivatives in Finance Overview - Chapter Summary

Take a look at this online study guide chapter to get a high-level overview of derivatives in finance. Broken into bite-sized topical lessons, the chapter examines the essentials of derivatives and derivative contracts, as well as a variety of models and methods that are used for derivative valuation. You can also expect to learn about hedging and futures contracts. As you work through the lessons, take the accompanying assessments to make sure you fully understand the material. The chapter also comes with a comprehensive exam as well as a feature that allows you to submit questions to our subject-matter experts. These study resources are accessible on any computer or mobile device. When you're finished, you should be able to:

  • Discuss the characteristics of derivative markets
  • Detail how derivatives are used in portfolio management
  • Define the concept of hedging in finance
  • Recognize examples of futures, forward and swap contracts
  • Relate fundamentals of option valuation
  • Explain the international Fisher effect, forward rates and interest rate parity
  • Conduct valuation using the Black Scholes Merton Model
  • Explain how the binomial lattice model is used to valuate derivatives

10 Lessons in Chapter 22: Derivatives in Finance Overview
Test your knowledge with a 30-question chapter practice test
Derivative Markets: Types & Characteristics

1. Derivative Markets: Types & Characteristics

Explore several types of financial investments in this lesson. Understand how a financial security can possibly derive its value from another security.

Uses of Derivatives in Portfolio Management

2. Uses of Derivatives in Portfolio Management

This lesson provides an overview of portfolio management and derivatives. Then, you will look at the ways in which derivatives are used in portfolio management.

What is a Forward Contract? - Definition & Examples

3. What is a Forward Contract? - Definition & Examples

A forward contract is a popular investment tool used by large corporations and small investors alike. This lesson defines the term forward contract and explains its use through various examples.

What are Futures Contracts? - Definition & Examples

4. What are Futures Contracts? - Definition & Examples

As turbulent as the financial and commodity markets can be, businesses can benefit by 'locking in prices' now. In this lesson, we'll learn about futures contracts and how they help businesses accurately forecast or offset their rising costs.

What is a Swap Contract? - Definition & Examples

5. What is a Swap Contract? - Definition & Examples

This lesson describes and explains the mechanics of interest rate swaps and other swap contracts. You'll also learn how swaps are used by borrowers and investors to reduce risk, add risk, or exchange one type of risk exposure for another.

Fundamentals of Option Valuation

6. Fundamentals of Option Valuation

Option contracts are derivative financial instruments that obtain their value from an underlying asset - usually a stock. In this lesson, we'll discuss the components that are involved in determining the exact price of an options contract.

Hedging in Finance: Definition & Example

7. Hedging in Finance: Definition & Example

When individuals and institutions have investments in the stock market, they are exposed to the risk of financial losses. In this lesson, we'll learn about a way to protect against some losses, known in the financial industry as hedging.

Interest Rate Parity, Forward Rates & International Fisher Effect

8. Interest Rate Parity, Forward Rates & International Fisher Effect

How do interest rates affect companies that do business in multiple countries? In this lesson, we'll look at exchange and interest rates, including interest rate parity, the international Fisher effect, and interest arbitrage.

Using Black Scholes Merton Model for Valuation

9. Using Black Scholes Merton Model for Valuation

The Black Scholes Merton Model was the first to provide a framework for pricing European style put and call options. We will work through an example and examine the determinants of option prices.

Binomial Lattice Model & the Valuation of Derivatives

10. Binomial Lattice Model & the Valuation of Derivatives

As the Black-Scholes model gained popularity, option holders sought a better model that could be used to price American-style options. Along came the more flexible Binomial Lattice Model to do the job. We will illustrate it with an example.

Chapter Practice Exam
Test your knowledge of this chapter with a 30 question practice chapter exam.
Not Taken
Practice Final Exam
Test your knowledge of the entire course with a 50 question practice final exam.
Not Taken

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Support