As a hypothetical example, if you deposit 100 yen at 2% compound interest, compounded semiannually, how much do you have after one year?
For practitioners and systems staff at financial institutions
Derivatives Compass
Learn how derivatives work, from products to operations and regulation, with diagrams and simulators.
The site covers product history, client-facing and internal operations, and regulation in Japan and other jurisdictions. Every page is free and available in Japanese and English.
What you can do here
Illustrated articles
Read how products and operations work, with cash flow and payoff diagrams.
Simulators
Change the inputs and see how prices and profit and loss respond.
Quizzes
Check what you have read with questions for each chapter.
Glossary and timeline
Look up definitions, and events in markets and regulation.
Browse by field
Foundations
What every other field assumes: interest and time value, who uses derivatives and why, and how listed and OTC trading work.
- Core ConceptsThe groundwork for the rest of the site: interest and time value, day counts, building yield curves, and basic probability and statistics.11 pages
- Market Participants and UsesWho uses derivatives (dealers, corporates, investors and banks), why they use them, and how large the market is.7 pages
- Listed and OTC TradingHow exchange-traded and OTC derivatives differ, and how clearing, contract specifications and margin work.5 pages
Products
The basic contract types from forwards to options, products by underlying such as rates, FX, equity and credit, benchmark rates, and structured products.
- Product Building BlocksThe basic building blocks (forwards, futures, swaps and options) and the main types of exotic options.15 pages
- Interest Rate DerivativesProducts based on interest rates, from FRAs, futures and swaps to caps, swaptions and callable structures.17 pages
- Benchmark RatesBenchmark rates such as TONA, TIBOR and SOFR, compounding in arrears, and the transition away from LIBOR.10 pages
- FX DerivativesFX forwards, FX swaps, cross-currency swaps and currency options, plus exotics such as TARFs and PRDCs.11 pages
- Equity DerivativesDerivatives on stocks and indices, from index futures and options to equity swaps, variance swaps and autocallables.11 pages
- Credit DerivativesProducts that trade credit risk: how CDS work and are valued, CDS indices, and synthetic CDOs.6 pages
- Inflation DerivativesInflation swaps, inflation caps and floors, and inflation-indexed JGBs and BEI.3 pages
- Commodity DerivativesDerivatives on oil, natural gas, power, metals, agricultural products and emission allowances.6 pages
- Other DerivativesDerivatives on weather, volatility, insurance and longevity risk, real estate and freight.6 pages
- Structured ProductsBonds, deposits and loans with embedded derivatives, and how to break them down into their components.10 pages
Valuation and Risk
How derivatives are priced, traded and hedged, how market, counterparty, liquidity and operational risk are measured and managed, and how capital and profitability are run.
- ValuationPricing theory and practice: no-arbitrage, Black–Scholes, the Greeks, XVA, pricing models and numerical methods.23 pages
- Trading and HedgingDelta hedging, managing gamma and vega, market making and volatility trading.5 pages
- Market RiskMeasuring and testing market risk with sensitivities, VaR, expected shortfall, stress tests and backtesting.5 pages
- Counterparty Credit RiskMeasuring counterparty credit risk, reducing it with netting and collateral, managing credit limits, and the regulatory treatment.8 pages
- Liquidity and Funding RiskThe funding cost of margin, meeting margin calls, sourcing collateral, and the treatment under the LCR and NSFR.4 pages
- Operational RiskOperational risk in derivatives business, from booking errors and confirmation breaks to failed settlements and rogue trading.4 pages
- Capital and ProfitabilityRisk-weighted assets, the leverage ratio, P&L attribution, KVA and funds transfer pricing.5 pages
Operations and Systems
Day-to-day work with clients and inside the institution, the systems and data behind it, and which entity books each trade.
- Client-Facing BusinessClient-facing work, from understanding needs, explaining products and checking suitability to execution, valuation reports and early termination.10 pages
- Internal OperationsFront, middle and back office roles, and the daily work of trade processing, P&L, collateral, settlement and reporting.10 pages
- Data and SystemsFront-to-back system architecture, market data and overnight batches, and data standards such as FpML, CDM and LEI.8 pages
- Booking ModelsWhich legal entity books a trade, intragroup back-to-back trades, and planning for recovery and resolution.4 pages
Accounting, Legal and Infrastructure
Accounting and tax treatment, ISDA documentation, market infrastructure such as CCPs, and governance and client protection.
- AccountingFair value measurement, hedge accounting, embedded derivatives and disclosure under Japanese GAAP, IFRS and US GAAP.9 pages
- TaxTaxation of derivative gains and losses, withholding tax, and transfer pricing for cross-border trades.3 pages
- Documentation and LawThe ISDA Master Agreement, CSAs, termination events, and close-out netting and its enforceability.7 pages
- Market InfrastructureThe infrastructure behind trading: CCPs, trade repositories, compression, electronic trading platforms and portfolio reconciliation.10 pages
- Governance and ControlsThe three lines model, new product approval, limit frameworks, model risk management and independent price verification.5 pages
- Client Protection and ConductMis-selling cases, complaint handling and dispute resolution, and conduct risk.3 pages
Regulation
Regulation in Japan, the United States, the EU and UK, and Asia-Pacific, together with international standards and themes that cut across jurisdictions.
- Regulation: JapanJapanese regulation, including the Financial Instruments and Exchange Act, mandatory clearing, margin rules, trade reporting and suitability.10 pages
- Regulation: United StatesThe roles of the CFTC and SEC, the Dodd-Frank Act, the Volcker Rule, and the clearing, reporting and trade execution mandates.6 pages
- Regulation: EU and UKEMIR, MiFID II and MiFIR, UK EMIR, PRIIPs and the Benchmarks Regulation.6 pages
- Regulation: International StandardsThe G20 OTC derivatives reforms and international standards such as the Basel framework, margin requirements, FRTB and SA-CCR.6 pages
- Regulation: Asia-PacificDerivatives regulation in Hong Kong, Singapore, China, South Korea and Australia.6 pages
- Regulation: Cross-Border ThemesMarket manipulation, anti-money laundering and sanctions, insider dealing, best execution and record keeping.5 pages
History and Trends
The history of the markets and their crises, and new developments such as ESG, crypto-assets and digitalization.