1. Course Content

1. INTRODUCTION

i. What are the different types of derivative instruments?
ii. Forward Contracts

• Example – The Investment Bank Intern

iii. Future Contracts
iv. Options

• Maturities and Exercise date

2. PAYOFF PROFILES

i. The Payoff profile for a forward contract
ii. Payoff profiles for Calls and Puts

3. BUILDING BLOCKS AND SYNTHETIC CONFIGURATIONS

i. Comparing a Call with a Forward contract
ii. Comparing a Call and a Put with a Forward contract
iii. Combining a long call with a short put to create a long forward

EXCEL Examples

No

2. Introduction

Think about a bottle of ice cold spring water in New York, in the Gobi Desert and in the Swiss Alps where the water was bottled.

You can assume that the bottle can be safely and cheaply beamed (as in ‘Beam me up Scottie’) from the Alps to New York as well as to the Gobi Desert. Would the price of the bottle be different at the three locations? Why?

The value of the bottle at each location is dependent not on itself but on an external factor. The environment! -reflected by paying capacity in New York, abundance in the Alps and, heat and scarcity in the Gobi Desert.

A derivative instrument is very similar to bottled water in the Gobi Desert. Its value is determined completely by external variables. The external factor could be anything but in general is either a financial asset or an economic variable (such as interest rates). The external factor or variable is called the underlying.

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