Introduction to Derivatives and Hedging

📋 Course Outline

1. Derivatives and contract types
2. Forwards and arbitrage
3. Option positions and payoffs
4. Market participants and zero-sum trading
5. Futures markets and clearinghouses
6. Margining and mark-to-market
7. Hedging with futures and basis risk
8. Cross hedging and hedge ratios
9. Equity portfolio hedging
10. Options mechanics and valuation
11. Protective puts and option strategies

📖 1. Derivatives and contract types

🔑 Key Concepts & Definitions

• Derivative : A derivative is a contract whose value depends on an underlying asset, transferring risk between parties rather than creating value itself.
• Forward contract : A forward contract is an OTC agreement to buy or sell an asset at a specified forward price on a future date with both parties obligated to perform.
• Futures contract : A futures contract is an exchange-traded standardized forward that is settled daily via a clearing house using mark-to-market.
• Options contract : An options contract gives the holder a right but not an obligation to buy or sell at strike price K, with an upfront premium and an asymmetric payoff.
• Call option : A call option is the right to buy the underlying at strike price K, making it profitable when the underlying finishes above K plus the premium.

📝 Essential Points