DERIVATIVE

PRODUCTS

By Jawwad Ahmed Farid

D E R I V A T I V E P R O D U C T S

CONTENTS
DERIVATIVE PRODUCTS ................................................................................................................................ 5
1. REVIEW ............................................................................................................................................. 5
A second look at derivative contracts ....................................................................................................... 5
Standard Template for Evaluating Derivatives .......................................................................................... 6
2. VANILLA PRODUCTS ............................................................................................................................. 7
Options ...................................................................................................................................................... 7
3. PRICING BASICS .................................................................................................................................. 10
Option Price .............................................................................................................................................. 10
Asset Price ..................................................................................................................................... 10
Exercise Price ................................................................................................................................ 10
Interest Rates ................................................................................................................................ 10
Volatility of the Asset Price ........................................................................................................... 10
Time to expiration ......................................................................................................................... 10
Cash Distributions ......................................................................................................................... 10
European option price .............................................................................................................................. 11
4. GREEKS AND BINOMIAL TREES ............................................................................................................... 11
American option price ............................................................................................................................... 13
5. OPTIONS ON SHARES, STOCKS, CURRENCIES AND EQUITIES ........................................................................... 15
Stock Options ............................................................................................................................................ 15
Foreign Currency Options ......................................................................................................................... 15
Index Options ............................................................................................................................................ 15
Futures Options ......................................................................................................................................... 15
Warrants ................................................................................................................................................... 15
Employee Stock Options ........................................................................................................................... 16
Convertibles .............................................................................................................................................. 16
6. OPTIONS ON RATES ............................................................................................................................. 16
Bond Options ............................................................................................................................................ 16
Embedded Bond Options .............................................................................................................. 16
Interest Rate Caps/ Floors/ Collars ........................................................................................................... 17
European Swap Options ............................................................................................................................ 17
7. EXOTIC OPTIONS ................................................................................................................................. 18
Bermuda option ........................................................................................................................................ 18
Quanto option ........................................................................................................................................... 18
Composite option ...................................................................................................................................... 18
Digital or Binary or All or nothing options ............................................................................................. 18
Barrier options .......................................................................................................................................... 18
Asian options ............................................................................................................................................. 19
Average Strike Options .............................................................................................................................. 19
Look back options ..................................................................................................................................... 19
Compound options .................................................................................................................................... 19
Chooser (As you like it) options ................................................................................................................ 19
Exchange options ...................................................................................................................................... 19
Forward start options ............................................................................................................................... 19

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D E R I V A T I V E P R O D U C T S

Basket options ........................................................................................................................................... 20

Shout options ............................................................................................................................................ 20
8. FORWARD CONTRACTS ......................................................................................................................... 20
Forward Price ............................................................................................................................................ 21
Forward price of a security with no income: ................................................................................ 21
Forward price of a security with known cash income: ................................................................. 21
Forward price of a security with known dividend yield: ............................................................... 21
Synthetic Forward Contract ...................................................................................................................... 21
Forward Rate Agreement .......................................................................................................................... 22
9. FUTURES ........................................................................................................................................... 22
Futures price ............................................................................................................................................. 22
Stock Index futures ................................................................................................................................... 23
Futures contracts on currencies ................................................................................................................ 23
Futures contracts on commodities ........................................................................................................... 23
Interest Rate Futures ................................................................................................................................ 23
Treasury Bond Futures .................................................................................................................. 23
Treasury Note Futures .................................................................................................................. 23
5-year Treasury Note Futures ....................................................................................................... 24
Treasury Bill Futures ..................................................................................................................... 24
Eurodollar Futures ........................................................................................................................ 24
10. SWAPS ............................................................................................................................................ 24
Interest Rate Swap .................................................................................................................................... 24
Currency Swap .......................................................................................................................................... 25
Fixed for fixed currency swap ....................................................................................................... 25
Floating for floating currency swap .............................................................................................. 25
Cross-currency interest rate swap ................................................................................................ 25
Variations to Plain Vanilla Swaps .............................................................................................................. 25
Step-up Swaps .............................................................................................................................. 25
Amortizing Swaps ......................................................................................................................... 25
Basis Rate Swap ............................................................................................................................ 25
Forward or Deferred Swaps .......................................................................................................... 25
Compounding Swaps .................................................................................................................... 25
LIBOR-in- Arrears Swap ................................................................................................................. 26
Constant Maturity Swap ............................................................................................................... 26
Constant Maturity Treasury Swap ................................................................................................ 26
Differential Swap or Quanto ......................................................................................................... 26
Variance or Volatility Swap ........................................................................................................... 26
Equity Swap .................................................................................................................................. 26
Commodity Swap .......................................................................................................................... 26
Asset Swap .................................................................................................................................... 26
Accrual Swap ................................................................................................................................. 26
Cancelable Swap ........................................................................................................................... 26
Extendable Swap ........................................................................................................................... 26
DISCLAIMER .............................................................................................................................................. 27


Please do not photocopy or distribute without permission. All rights reserved Alchemy Software Pvt Limited.
http://FourQuants.com
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