Derivative Pricing - Basic Video

This course begins with a discussion of the definition of a derivative instrument, the various types of derivative instruments, their similarities, differences and special features including their payoff profiles. Product variations within each derivative category are elaborated. Typical qualifications that are presented with a derivative instrument term sheet are reviewed. This is followed by an in depth look at the features and factors impacting the prices of derivative instruments.

Next, basic derivative pricing formulas and approaches are reviewed. The Black Scholes formula for pricing European call and put options is presented including an explanation and intuitive derivation of its risk adjusted probabilities as well as the formulas for option Greeks. The traditional approach for constructing a binomial tree to price American options is given. The course concludes with a look at how a Monte Carlo simulator may be constructed in EXCEL and how it is then used to price a European call option.

This course consists of three lessons:

• Lesson 1 – Terminology


• Lesson 2 – Products


• Lesson 3 – Option pricing using Monte Carlo Simulation

After taking this course you will be able to:

• List the various categories of derivative instruments


• Define each type of derivative instrument and their features


• Compare the characteristics of each product category


• Construct and interpret the payoff profiles for forwards and options


• Construct payoff profiles for synthetic structures


• State the general qualifications that are presented and shared with a typical derivative deal


• Evaluate and analyze the various factors involved in a derivative transaction to assess whether or not to enter into the transaction based on the level of risk and suitability for a client


• Recognize how various factors impact option price


• Calculate the value of an option using the Black Scholes formula


• Discuss what the risk adjusted probabilities of the Black Scholes formula actually mean


• Derive N(d2) using an intuitive method


• Define and calculate option price sensitivities, i.e. Greeks


• Construct a traditional binomial tree and compute the values of American options


• Describe the product variations to the basic derivative instruments


• Calculate forward and futures prices, values of forward contracts, forward rate agreements and future contracts


• Build a Monte Carlo simulator in EXCEL and use it to price an European call option

The candidate should be comfortable with basic mathematics, statistics, probability and EXCEL.

This course is for beginners in the finance field and is also aimed at banking, corporate, treasury and sales teams.