Become a Derivatives Master

Complete your derivatives toolkit and develop your intuition. This module helps strengthen your knowledge-base and sharpens your understanding of the tools at your disposal in the world of futures & options.

Option valuation models are more than just calculators to determine an option’s value. They are insightful tools since they “break” options down into simpler components. Studying the methodology behind a model not only helps to judge the model’s usefulness and limitations but it also opens up new perspectives on how to think about options.

The relationship between volatility and option valuation is central and very subtle. Volatility measures the price fluctuation of the underlying. This volatility then gives value to an option. “Implied” volatility on the other hand is a proxy for option prices and leads to the so-called volatility smile.

Option models describe the relationship between market parameters and option value. But their formulaic language is not the brain’s preferred way to absorb information. That is why we study option graphs. Graphs help us visualize option behavior.

Equity options are typically American style. But what is the point of an American option? Why does anyone want the additional flexibility to exercise prior to expiry? The answers depend on what the underlying to the option is, an equity, a bond, a foreign currency, a precious metal or some commodity, or a future. We’ll discuss all questions around the why and when to early exercise an option.

Most investors use derivatives as part of a well-defined investment or risk-management strategy. This module is all about matching investors’ needs with the appropriate investment strategy. We start with the investor. What are the common investment objectives, needs, and preferences? We then move to the investment side and develop a framework to describe, compare and build investment strategies with different risk profiles.

Currency risk is the inevitable by-product of international diversification. We investigate how FX exposure can be managed using forward, vanilla options or more exotic derivatives. The symmetrical nature of currencies forces us to think more symmetrically and makes the duality between pricing and risk management even more obvious.