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Derivatives Crash Course for Dummies

A review of posts that present a free introductory course for beginners with simple examples to introduce basic vanilla derivative products as well as the difference between forwards, futures and options.  For a more detailed Crash course in Corporate Finance to build the foundations required to complete this course please see the Corporate Finance Training Guide Road map.

In our Derivative Crash Course, we start off with Derivative Payoff profiles and synthetics construction of products, followed by a set of simple assessment quizzes and a derivative pricing and equation reference. The Crash Course is followed by an intermediate course that reviews product variation and basic pricing concepts. The objective here is to simply introduce derivative concepts in bite sized pieces.

Derivatives Crash Course – Training Workshops & Transcripts

Derivatives Pricing Reading & Training Materials

Derivatives Crash Course – Understanding Greeks

No derivatives introduction is complete without a review of Greeks and Delta hedging. The first two posts provide a short overview of Option Greeks. The last post walk through a step by step process of building a Delta hedging model in Excel using Monte Carlo Simulation.

Options Greeks - Delta, Gamma, Vega, Theta & Rho










Derivatives Crash Course – Hedging Higher Order Greeks

Delta hedging is useful when hedging your option portion against small increments in the price of the underlying. However for larger jumps in the underlying’s price higher order Greeks like Gamma and Vega need to be factored into our hedge portfolio.

The first post gives a view of what the P&L distribution would look like if we factor in Gamma into our delta hedging model. While the second post presents a series of lessons which discuss the reasons why Gamma hedging differs from Delta hedging (i.e. why it does not involve buying or selling the underlying) and presents a model in EXCEL using the Solver functionality for hedging a single option position as well as a portfolio of options.

Derivatives Crash Course – Other second order & volatility Option Greeks

We look at some related metrics and their uses:

Additional Reading Material

If you would like to learn more about this subject we also recommend the second more advanced course on derivative products that digs deeper into the subject.

Also see review of Fixed Income derivatives, MTM & Valuation Models for a review of Interest Rate Swaps, Caps & Floors. The Fixed Income derivatives, MTM & Valuation Models course also walks through the basics of building a simple valuation model.

In addition, once you have completed your Fixed Income Derivatives Review, you should also see the two step by step pricing case studies. The first case walks through the process of building a projected forward interest rate curve using the bootstrapping approach. The second case reviews the process of Mark to Market for an Interest Rate Swap under the original term structure as well as the revised and updated interest rate term structure 6 month later.

Between the two cases we build a 5 step, 5 year curve and then extend it to hedge a 10 step, semi annual floating rate loan with an Interest Rate Swap.

a. Bootstrapping Zero and Forward Interest Rate Curves in Excel

b. Pricing, MTM, Valuing Interest Rate Swaps using Forward Curves in Excel

 Exotic Option pricing using Monte Carlo Simulation Excel Sheet

Option Pricing using Monte Carlo Simulation

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