Products
Product Building Blocks
The basic building blocks (forwards, futures, swaps and options) and the main types of exotic options.
Introductory6 pagesPractitioner5 pagesAdvanced4 pages
1Basic Structures
- IntroductoryWhat Is a Derivative?Profit or loss depends on which way the price of the underlying moves after the terms are fixed, and in a forward the buyer's gain is exactly the seller's loss.
- IntroductoryForwards and FuturesAt maturity, the buyer's profit or loss is "price at maturity − forward price" and the seller's is the reverse. The seller's loss has no upper limit.
- IntroductoryHow Swaps WorkEvery swap contract sets a notional amount, a term, payment dates, and how payments are calculated.
2Option Basics
- IntroductoryOption Basics: Calls and PutsThe terms of an option are set by five items: the underlying asset, call or put, the strike price, the expiry, and the premium.
- IntroductoryOption Payoffs and Profit/LossBuy a call option (call) with a strike price of 100 yen for a premium of 5 yen, and the profit or loss is a constant −5 yen at or below 100 yen at expiry.
- IntroductoryExercise Styles: European, American and BermudanThe style sets only when the option can be exercised, and it is decided separately from the type of option and the strike price.
- PractitionerPut-Call ParityFor an underlying asset that pays no dividends, call price − put price = underlying price − strike price × discount factor.
- PractitionerOption StrategiesThe profit and loss of a combination at expiry is the sum of each trade's profit and loss, and the net premium shifts the break-even points.
3Types of Exotic Options
- PractitionerOverview of Exotic OptionsEven when the price at expiry is the same, a payoff set by the average or the highest price over the period changes with the path the price took.
- PractitionerBarrier OptionsCombining whether the barrier is above or below the current price with whether touching it cancels or creates the right gives four types each for calls and puts.
- PractitionerDigital OptionsA cash-or-nothing call pays the same fixed amount however far the price at expiry ends above the strike price.
- AdvancedAsian OptionsThe payoff is the difference between the average of observed prices and the strike price (average-price type), or between the price at expiry and the average (average-strike type).
- AdvancedLookback OptionsThere are two forms. A fixed-strike option compares the strike with the highest or lowest price. A floating-strike option uses the lowest price (call) or the highest price (put) over the period as the strike.
- AdvancedBasket OptionsThe amount by which the basket value at expiry exceeds the strike price is the payoff, and gains and losses on the individual assets offset each other.
- AdvancedQuanto OptionsThe payoff is the difference in the foreign currency multiplied by the exchange rate fixed at the start of the trade, so the exchange rate at expiry does not affect it.