Derivatives
Peter Moles
Derivatives are key instruments for firms to transfer and mitigate their risks. The major classes are forward contracts, futures, options and swaps. According to Robert Merton, risk management is one of the key functions of the financial system and also one of the analytical pillars of finance. The theory of option pricing is one of the key ideas in finance for which Myron Scholes and Robert Merton were awarded their Nobel Prize.
The Black-Scholes-Merton option-pricing model has been described as 'the workhorse of the financial services industry'. Understanding derivative pricing is important for financial engineers seeking to address financial problems. Derivatives are important instruments for firms to manage risk. Financial futures are one of the most heavily traded markets in the world. Swaps are among the newest risk management products. Option markets expanded following the introduction of the Black-Scholes model.
Topics covered
- The derivatives building blocks.
- Terminal instruments.
- Forward contracts.
- Futures.
- Swaps.
- The basics of options.
- Option pricing.
- The Black–Scholes option-pricing model.
- ‘The Greeks of option pricing’.
- Extensions to the basic option-pricing model.
- Using derivatives and hedging.
- Hedging and insurance.
- Using the derivatives product set.
