Understanding Financial Derivatives

Hi - Sharing my notes about fundamental instruments that exist in the derivatives market as the VP lacks information around this topic. Left side of the image shows the ‘Table of Content’ for quick reference.

You will gain knowledge about the below points:
· What is the need for the derivatives?
· What are derivatives?
· What is the most important objective of a derivative?
· What are Key Characteristics of derivatives?
· What are the sources of Risk in the financial assets?
· How to handle risk of financial assets?
· What are:

  • Various Derivative Market with their key characteristics-
    • Over the Counter (OTC)
    • Exchange Traded
  • Forward Commitments:
    • Forward contracts – Definition and Example for the Settlement and Payoff
    • Future Contract – Definition and Example for the Settlement and Payoff, and
    • Swaps - Definition
      • Fixed-for-Floating Interest Rate Swap
  • Contingent Claims:
    • Options:
      • Call- Buyer’s perspective
      • Call- Seller’s perspective
      • Put - Buyer’s perspective
      • Put - Seller’s perspective
    • Credit Derivatives and
    • Credit Default Swap
      • Asset Backed Securities (ABS):
        • Collateralized Mortgage Obligation (CMO)
        • Collateralized Debt Obligation (CDO)

All the above are must know foundations concepts for anyone who is interested in the financial market in general and securities such as Equity (Stocks) and Fixed Income (Bonds) in particular. Derivatives world is much larger and possibilities are endless in the form of various hybrid instruments such as callable bonds (combination of options and bond), convertible bonds, swaptions (combination of swaps and options). However, you must know these basics before moving to the next level of knowledge.

Let us begin the joy of learning.