Year 2 · Core Finance · Derivatives
Derivatives Foundations
Understand how forwards, futures, swaps and options transfer market risk; distinguish payoff from profit; use long and short positions for hedging or speculation; and understand margin, clearing, counterparty risk, basis risk and no-arbitrage pricing.
LEARNING OBJECTIVES
What you should be able to explain after this lesson
01
Explain what a derivative is and distinguish the main contract families.
02
Calculate basic forward, futures and option payoffs.
03
Distinguish payoff, profit, notional exposure and initial cash outlay.
04
Explain how swaps exchange cash-flow profiles rather than principal ownership.
05
Understand margin, daily settlement, clearing and counterparty-risk controls.
06
Apply no-arbitrage logic, identify basis risk and distinguish hedging from speculation.
CONCEPT MAPThe derivative workflow
A derivative derives its value from another price, rate or event
CORE FACTS · SAME IN EVERY MODE
A derivative is a contract whose value depends on an underlying asset, rate, index, spread, currency, commodity, credit event or other reference.
Common derivative families include forwards, futures, swaps and options.
Derivatives can create large economic exposure relative to initial cash exchanged, so notional and market value are different concepts.
Derivatives are used for hedging, risk transfer, market access, relative-value trading, price discovery and speculation.
BeginnerTeaching style changes, knowledge does not.
A derivative does not need to mean 'complicated bet.' Imagine an airline agreeing today on the price it will pay for fuel in the future. The contract's value changes when fuel prices change. That contract transfers price risk between two parties.
COMPARISON
Four foundational derivative families
| Contract | Core idea |
|---|---|
| Forward | Trade later at a price agreed today |
| Future | Standardized, margined forward-like contract |
| Swap | Exchange streams of cash flows |
| Option | Right without symmetric obligation for the buyer |
PROFESSIONAL VOCABULARYUnderlying / sous-jacent / underlying Notional / notionnel / notional
Reference asset, rate, index or event that drives derivative value.
Reference amount used to determine derivative cash flows or exposure; not necessarily cash exchanged.