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.
- Master Class: Options and derivatives crash course: Session One: Terminology
- Master Class: Options and Derivatives Crash Course: Session Two: Forward, Futures and Options
- Master Class: Options and Derivatives Crash Course: Session Three: Payoff profiles – Forwards
- Master Class: Options and Derivatives Crash Course: Session Four: Payoff profiles – Options, Calls and Puts
- Master Class: Options and Derivatives Crash Course: Session Five: Synthetics
- Master Class: Derivatives Crash Course: What did you miss in the Synthetic forward diagram above
Derivatives Crash Course – Training Workshops & Transcripts
- Understanding Derivatives Sales Process: Introducing the Bank Treasury Function
- Selling derivatives products to treasury customers
Derivatives Pricing Reading & Training Materials
- Option Pricing using Binomial Trees in Excel
- Option Pricing – Building Monte Carlo Simulators in Excel
- Option Pricing using Monte Carlo Simulation – Model Review
- Option Pricing – Pricing Ladder Options using Monte Carlo Simulators in Excel
- Building implied and local volatility surfaces in Excel
- Volatility surfaces, implied volatilities, smiles and skews
- Volatility surface, deep out of the money options and lottery tickets.
- The difference between implied and local volatility – volatility surfaces
- Creating the volatility surface dataset using implied volatilities
- Implied and Local Volatility Surfaces in Excel – Final steps
- Calculating Forward Implied Volatility in Excel
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.
- Understanding Option Greeks – A quick reference guide to Delta, Gamma, Vega, Theta and Rho
- Understanding Option Greeks – A second look at Delta and Gamma
- Delta Hedging Call Options – Building a Monte Carlo simulator in Excel
- Understanding Greeks – The Delta Hedging Simulation extended for Put Options
- Option Greeks & Delta Hedging – Calculating & Simulating Cash PnL
- Option Greeks & Delta Hedging – PnL, Implied Volatility & Rho
- Under Option Greeks – Introducing Gamma
- Dissection of Theta and time premiums for call options
- Implied volatility and hedge P&L. Mapping P&L distributions
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.
- Gamma Correction, Delta Hedging P&L & Rebalancing Frequency
- Hedging Higher Order Greeks – Hedging Gamma and Vega using Microsoft EXCEL
Derivatives Crash Course – Other second order & volatility Option Greeks
We look at some related metrics and their uses:
- Calculating Shadow Gamma – Taleb’s approach for the second order option Greek.
- Vega, Volga and Vanna. The option volatility Greeks.
- Understanding Alpha or Gamma Rent
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.