Derivatives Summary (BS3385) (Grade: 75%)

Notes

Topic 1: Futures markets and trading
Visualisation :




Short F orward Contract :
P rofit(Loss) = #shares ∗ (contract price − share price)
Share price is at expiration.

Example : 340 shares ∗ ($3, 375 − $3, 280) = +$32, 300
Long F orward Contract :
P rofit(Loss) = #shares ∗ (share price − contract price)


Notes 1

, Share price is at expiration.

Example : 12, 000 barrels ∗ ($67 − $24) = +$372, 000
Margin Call :
Happens if the Margin Account falls below Maintenance margin
Cashflow in margin account (for each contract):

P rofit(Loss) = #contracts ∗ (share price −
contract price) = (Initial margin −
maintenance margin)
Solve for share price.

Example : 15, 000 pounds ∗ (Ft − $1.6) = −$1, 500 →
Ft = $1.5
Withdrawal of $X for Y contracts:

P rofit(Loss) = #contracts ∗ (share price −
contract price) = X
Y
Solve for share price.



Topic 2: Futures Pricing and Hedging
F orward P rice : F = (S − I) ∗ e(r−q)T
S : Current P rice
r : Riskfree Compounded Interest Rate
q : Dividend Yield on Stock Index
X
T = time in years = 12
I = P resent Value of all relevant dividend payments
P resent Value of all relevant dividend payments : I = ∑ vi ∗
−rT
e
v = value of dividend i
P erfect Hedge : Uncertainty about performance of investment is
completely eliminated.




Notes 2

, Imperfect Hedge : Hedging error can be either positive or negative,
which makes is possible for the Imperfec to have a better outcome.

Imperfect Hedge still has some price risk.



Topic 3: Options Markets and Trading




Topic 4: Principles of Options Pricing
Shortcuts :




Notes 3