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Lecture# Introduction to Derivatives

Description

This lecture introduces the concept of derivatives, covering forward contracts and options. It explains the obligations and payoffs of long and short positions, as well as the basic uses of derivatives such as hedging, speculation, and arbitrage. The lecture also explores portfolio insurance, hedging strategies with forwards and puts, and various speculative strategies like bear spreads, straddles, and butterfly spreads.

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Related lectures (10)

MGT-301: Foundations in financial economics

The aim of this course is to expose EPFL bachelor students to some of the main areas in financial economics. The course will be organized around six themes. Students will obtain both practical insight

Derivative (finance)

In finance, a derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply called the underlying. Derivatives can be used for a number of purposes, including insuring against price movements (hedging), increasing exposure to price movements for speculation, or getting access to otherwise hard-to-trade assets or markets.

Exotic derivative

An exotic derivative, in finance, is a derivative which is more complex than commonly traded "vanilla" products. This complexity usually relates to determination of payoff; see option style. The category may also include derivatives with a non-standard subject matter - i.e., underlying - developed for a particular client or a particular market. The term "exotic derivative" has no precisely defined meaning, being a colloquialism that reflects how common a particular derivative is in the marketplace.

Partial derivative

In mathematics, a partial derivative of a function of several variables is its derivative with respect to one of those variables, with the others held constant (as opposed to the total derivative, in which all variables are allowed to vary). Partial derivatives are used in vector calculus and differential geometry. The partial derivative of a function with respect to the variable is variously denoted by It can be thought of as the rate of change of the function in the -direction.

Arbitrage

In economics and finance, arbitrage (ˈɑːrbᵻtrɑːʒ, -trɪdʒ) is the practice of taking advantage of a difference in prices in two or more markets; striking a combination of matching deals to capitalise on the difference, the profit being the difference between the market prices at which the unit is traded. When used by academics, an arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, it is the possibility of a risk-free profit after transaction costs.

Total derivative

In mathematics, the total derivative of a function f at a point is the best linear approximation near this point of the function with respect to its arguments. Unlike partial derivatives, the total derivative approximates the function with respect to all of its arguments, not just a single one. In many situations, this is the same as considering all partial derivatives simultaneously. The term "total derivative" is primarily used when f is a function of several variables, because when f is a function of a single variable, the total derivative is the same as the ordinary derivative of the function.

Introduces derivatives, forward contracts, options, and their financial uses.

Introduces the history and concepts of derivatives, including forward contracts, options, and their use in hedging and speculation.

Covers the basics of derivatives, including hedging, leveraging, spreads, payoffs, and pricing models for underlying assets.

Explores arbitrage-free and complete financial market models, risk-neutral probabilities, structured notes pricing, and option hedging.

Covers derivatives pricing, replication, and interpretation, including examples of call options, forward contracts, and put options.