About This Chapter
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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