## DERIVATIVES MASTER CLASS

### INSTRUCTOR

Douglas Carroll Read bio

### course overview

The Derivatives Master Class is a two-day program designed for those already familiar with the basic contract features and terminology of derivatives who are seeking to take to the next level their understanding of derivative valuation, risk management and trading strategies. The program will be apportioned about evenly between futures, options and swaps. Each product segment will begin with a quick review of the ways in which contract features impact the risk/reward characteristics of the derivative instrument being discussed. That discussion will provide a natural lead into an exploration of widely used methodologies for pricing and valuation. The presentation will emphasize how these insights from these valuation methodologies are used to assess the attractiveness of various trading strategies and inform as to the optimal contracts to employ when undertaking a given strategy. Each product section will conclude with an exploration of typical positioning and risk management strategies employed by traders, hedge funds and investment portfolio managers.

### who should attend

The seminar would be useful for anyone whose duties entail some exposure to any derivatives related business activities. The program would be especially helpful to those working in areas supporting derivatives trading or sales as well as middle and back office areas such as:

- Clarence and settlement
- Compliance
- Audit or financial control
- Systems/information technology
- Portfolio administration
- Marketing

The program would also be useful to investment professionals with some derivatives experience that are seeking to deepen their knowledge of the topic:

- Securities traders
- Securities portfolio managers
- Securities sales

### course details

**Futures**

FUTURES PRICING AND THE FORWARD (FUTURES) PRICING CURVE

Futures Prices, Derivatives and Price Discovery

Futures Pricing – Cost of Carry (Arbitrage) Pricing

Composition of cost of carry (carrying charges)

Positive carry and negative carry

Implications of carry for the forward pricing curve

Arbitrage Pricing, Where It Holds and Why It Sometimes Doesn’t

Conditions necessary for full arbitrage pricing

Why full arbitrage pricing can fail and the consequences

Contango and backwardation

Futures prices versus expectations of future spot prices

HEDGING WITH FUTURES CONTRACTS

Concept of Hedging

Idealized – futures position exact opposite (offset) to underlying

Perfect hedges versus a realized effective price

Complications – standardized futures versus actual underlying

Margin finance risk

Mechanics of Constructing Hedge

Long hedges, short hedges and cross hedges

Number of futures contracts to fully hedge risk

Effective price on a hedged transaction/position

Basis, basis risk and how basis changes impact effective price

Hedged versus unhedged positions (basis risk versus price risk)

Hedging with Equity and Interest Rate Futures

Asset underlying futures versus spot market positions of hedgers

Relative sensitivities of futures versus underlying

Weighting hedges by beta (equities) or duration (debt/interest rate)

**OPTIONS**

PRICING AND VALUATION OF OPTIONS

Characteristics of Option Contracts and Option Pricing Basics Determinants of Option Values

Underlying price

Strike price

Time to expiration

Interest rates

Volatility

Option Pricing Dynamics - The “Greeks” and Their Applications

How professional traders quantify risk of option positions

Sensitivity of option price to change in value determinants

Permits traders to focus exposures and manage risk

The “Greeks”

Delta - option versus underlying price changes (dc/ds)

Theta - premium change due to the passage of time (dc/dt)

Gamma - delta’s sensitivity to u/l price change (d2c/ds2)

Rho - premium’s sensitivity to interest rate changes (dc/dr)

Vega (kappa) - premium change versus volatility (dc/dσ)

Interpretations and Applications

Methodology for calculation – derivatives of Black-Scholes formula

Insights regarding risk of option positions

Use in structuring and rebalancing trading strategies

OPTION TRADING STRATEGIES

Option Hedging Strategies

Investment/trading objective

Long versus short options as hedging vehicles

Delta neutral hedges

Determining appropriate hedge ratio

Dynamic hedging – rebalancing hedge ratio

Volatility Trading

Types of volatility: historic versus implied

Observation of implied volatility: volatility smile and volatility curve

Interpretations and implications

Mean reversion of implied volatility

Delta neutral ratio and back spreads

OPTION PRICING MODELS AND ARBITRAGE PRICING RELATIONSHIPS

Black-Scholes Option Pricing Model

Structure of model

Model assumptions

Applications

Binomial Pricing Models

Binomial trees – nodes, intervals and centering proposition

Binomial pricing process

Flexible versus standard binomial trees

Arbitrage Pricing – Put/Call Parity

Conceptual basis – equivalent portfolios

Interpretations and applications

Synthetic options

Arbitrage trading strategies

Use in selecting options in structuring trading positions

**SWAPS**

INTEREST RATE SWAPS

Pricing and Valuation of Interest Rate Swaps

Pricing at market (par) swaps

Pricing MAC (market agreed coupon) standardized swaps

Pricing basis (floating for floating) interest rate swaps

Interest Rate Swaps Applications

Converting a floating (fixed) rate liability to a fixed (floating) rate liability

Converting a floating (fixed) rate asset to a fixed (floating) rate asset

Hedging the value of fixed income securities

EQUITY SWAPS

Pricing and Valuation of Equity Swaps

Pricing equity for a fixed rate of interest equity swaps

Pricing equity for a floating rate of interest equity swaps

Pricing equity for equity swaps

Equity Swaps Applications

Hedging/risk management of equity exposure

Altering portfolio asset allocation

Foreign equity exposure without the currency risk

Synthetic long and short equity positions

REDIT DEFAULT SWAPS

Pricing and Valuation of CDS

Pricing negotiated single name and index CDS

Pricing standardized CDS

Credit Default Swaps Applications

Hedging bond and bond portfolio credit risk

Selling credit protection as an element of a fixed income portfolio

Buying protection on securities not owned to take a short credit view

VARIANCE SWAPS

Pricing Variance Swaps

Variance (volatility) strike

Variance notional

Vega notional

Variance Swaps Applications

Going long or short volatility

Selling volatility as a risk/return enhancer for a diversified portfolio

Buying volatility as macro hedge on tail risk

Volatility curve strategies

Relative volatility of two securities or indexes