Introduction Derivative Instruments – Terms, concepts, and Glossary, A-Z Online Finance – Option Terminology Glossary – Greeks, exotics and volatility

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This is the second more advanced course on derivative instruments and structured products. If you are looking for a Basic refresher on Corporate Finance, please see our Corporate Finance Training Guide Road map

Structured notes

Key Concepts

Any of the derivative instruments described in previous sections can be combined with a bond or note to create a structured asset whose performance mimics that of the derivative itself….

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Key concepts

Credit derivatives are instruments whose value is derived from that of an underlying bond, loan or other credit agreement. They are used to assume or lay off credit risk in isolation from other types of risk. The two main instruments are credit default swaps and total return swaps and they:

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Adjustable strike option

Key concepts

Adjustable strike options are options whose strike is reset either automatically or by the holder, depending on the path/level of the underlying. Depending on the terms of the reset mechanism they are also known as moving/floating strike options, indexed-strike options, periodic (reset) options, ratchet/ladder options and step-up/step-down options.

They are often combinations of vanilla and digital or barrier options and in the two…

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Digital options

Key concepts

A digital option, also known as a binary option or an all-or-nothing option, either pays out zero or a pre-set amount. Unlike standard options therefore its payout is discontinuous: if the strike price is reached, a pre-determined amount is payable no matter by how much the option is in the money. (In the following pages ‘binary’ can be substituted for ‘digital’ in any of the…

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Complex swaps

Key concepts

Although the standard swap structures meet the needs of many hedgers and investors, there are occasions on which the circumstances of the parties require more highly-structured swap products. Many of these swaps take the standard interest rate swap structure and, by incorporating foreign exchange rate linkages, complex indexing of the payment streams and notional principal amounts, options and other contingencies, allow swap users…

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Compound options

Key facts

A compound option is an option to buy or sell another option. There are relatively few uses for single vanilla compound options. They can be used as a hedge for contingent exposures, such as the interest rate and foreign exchange risks that will be incurred if a company wins a tender contract but that will not exist if the company loses. They can also be used as…

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Multi Asset Options

Key facts

The value of a multi-factor option is determined by the behaviour of two or more underlying assets and therefore by the correlation between those assets. The main classes are rainbow and basket options. These options are useful in managing complex combinations of risks although the details of their pricing and mark-to-market value are complex. The assets involved need not all be from the same asset class….

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Key Concepts

An option is a contract, traded over-the-counter or on an exchange, that grants the buyer the right to buy (call option) or sell (put option) a pre-agreed amount (the notional principal) of a specified asset or index (the underlying) at a pre-determined price or rate (the strike price) and time specified in the contract. The option holder is said to exercise the option if he exercises…

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