Welcome to

FPN 113:
Nuclear Finance
 SECURITIES
BONDS

VEGA UNDERLYING
THETA SPECULATE

HEDGE ASSET
CREDIT
DELTA PAYOFF
FUTURES FORWARDS
RISK
DERIVATIVES
RHO
GAMMA PRICE
VANILLA MARGIN
EQUITY SWAPS
EXPIRATION

RATES EXOTICS FOREX CALLS

CONTRACT
PUTS
MONEYNESS
CAN YOU HEAR ME?

TYPE
“ManU” for YES
“Arsenal” for NO
Introduction to Derivatives

Lesson 1: Welcome
-What are Derivatives?
-Derivatives as Nuclear Power
-Users and uses
-Risk/Reward considerations
-Vanilla vs Exotic

Lesson 2: Into the “Futures”

-Contracts: Private or Public
-Time machines: Futures and Forwards
-Users and uses
-Hedging vs Speculation

Lesson 3: An Option of Choice

-Always plan for the rainy day
-What are your “Options”?
-Calls and Puts
-Users and uses
-Hedging vs Speculation

Lesson 4: Swaps: Change of Fate

-Don’t be satisfied with what you have!
-One man’s meat is another’s fish
-What can you trade?
-Users and uses

Summary
Q&A
Introduction to Derivatives
What are “Derivs”?

Derivatives are securities

that derive their value
from another financial
instrument(s) or
benchmark(s)
Characteristics:

• Leverage
• Liquidity

Key terms in Derivatives Advantages:

• Hedging
• Underlying Instrument • Market access
• Diversification tool
• Contract Expiry
• Price of the Derivative
Disadvantages:
• Risk
• Complexity
Introduction to Derivatives
Common Derivatives

Futures Options

Forwards Swaps
Introduction to Derivatives
Into the “Futures”

The Forwards Contract

A forwards contract in its basic form is an agreement by two parties to
trade an asset at an agreed upon date in the future

The underlying asset could be anything ranging from equities and

commodities to FX and other derivatives

The Futures Contract

A futures contract is very similar to forwards. It is also an agreement
between two parties to trade an asset in the future

The futures contract has some notable differences from the forwards.
This will addressed in the next slide
Introduction to Derivatives
Difference between Futures and Forwards

OTC vs Exchange Standardized vs Customized Settlement

Introduction to Derivatives
Hedging and Speculating via Futures/Forwards

Producers/Consumers hedge essential inputs in

order for secure availability and delivery

Hedges are also used to remove uncertainty

about price of inputs to aid business planning

Futures/ Forwards are also used to hedge existing

trade positions

Futures/ Forwards are also used to transfer and

manage risk
Introduction to Derivatives
Hedging and Speculating via Futures/Forwards

“The Bull” “The Bear”

Bulls are generally optimistic of market outcomes Bears are generally pessimistic of market outcomes
and so tend to go long on positions and so tend to go short on positions

The Bulls are in control during a market rally The Bears are in control during a market selloff

Derivatives can be used to express bullish Derivatives can be used to express bearish
convictions convictions
Introduction to Derivatives
Futures/Forwards: Payoff Diagrams (at expiry)

Long Position Short Position

100
100

100

Profit/Loss
Profit/Loss

100 0
0 Price of Underlying
Price of Underlying

-100
-100
Introduction to Derivatives
An “Option” of Choice
Introduction to Derivatives
Key Terms in Options

UNDERLYING PREMIUM STRIKE PRICE

Introduction to Derivatives
Key Terms in Options

EXPIRY

GREEKS
Introduction to Derivatives
Options: Payoff Diagrams (Call at expiry)

Long Position Short Position

100 100
Profit/Loss

Profit/Loss
100 105
0
0
Price of Underlying
-5
100 105 Price of Underlying

-100 - 100

Out of the Money (OTM) At the Money (ATM) In the Money (ITM)
Introduction to Derivatives
Options: Payoff Diagrams (Put at expiry)

Long Position Short Position

100 100

5
Profit/Loss

Profit/Loss
95 100 95 100
0 0
Price of Underlying Price of Underlying
-5

-100 -100
Out of the Money (OTM) At the Money (ATM) In the Money (ITM)
Introduction to Derivatives
Options over Cash?

Hedging Speculation Greeks Strategies

Let’s have a QUIZ!!!
Introduction to Derivatives
Swaps: A change of Fate

S I M

S W P A
Introduction to Derivatives
Swaps: Interest Rate Swap

FIXED RATE FLOATING RATE

Introduction to Derivatives
Swaps: Credit Default Swap

DEFAULT
PREMIUM
INSURANCE
Introduction to Derivatives
Summary

1
Derivatives in General

2
Futures/Forwards Contract

3
Options: Calls & Puts

4
Swaps: IRS & CDS
Thank you for
listening Q&A