Basics of Derivative Pricing and Valuation

CFA level I / Derivatives / Basics of Derivative Pricing and Valuation

Learning Outcome Statements

1. Concepts of arbitrage, replication, and risk neutrality in derivatives pricing
a. explain how the concepts of arbitrage, replication, and risk neutrality are used in pricing derivatives;

2. Value and price of forward and futures contract
b. distinguish between value and price of forward and futures contracts;

3. Determination of value and price of a forward contract
c. explain how the value and price of a forward contract are determined at expiration, during the life of the contract, and at initiation;

4. Monetary and nonmonetary benefits of holding the underlying asset
d. describe monetary and nonmonetary benefits and costs associated with holding the underlying asset and explain how they affect the value and price of a forward contract;

5. Forward rate agreement and its uses
e. define a forward rate agreement and describe its uses;

6. Difference between forward and futures prices
f. explain why forward and futures prices differ;

7. Similarity and dissimilarity of swap contracts with a series of forward contracts
g. explain how swap contracts are similar to but different from a series of forward contracts;

8. Value and price of swaps
h. distinguish between the value and price of swaps;

9. Value of a European option at expiration
i. explain how the value of a European option is determined at expiration;

10. Exercise value, time value, and moneyness of an option
j. explain the exercise value, time value, and moneyness of an option;

11. Factors affecting value of an option
k. identify the factors that determine the value of an option and explain how each factor affects the value of an option;

12. Put-call parity for European options
l. explain put–call parity for European options;

13. Put-call-forward parity for European options
m. explain put–call–forward parity for European options;

14. Determination of value of an option using one-period binomial model
n. explain how the value of an option is determined using a one-period binomial model;

15. Difference between the values of European and American options
o. explain under which circumstances the values of European and American options differ.

Basics of Derivative Pricing and Valuation: Chapter Test
12 Questions, 18 Minutes