Ebook: Analysis of Derivatives for the CFA Program

The book is intended to provide the derivatives analysis portion of the CFA curriculum, and is intended to communicate a practical risk management approach to derivatives for the investment generalist.

Derivatives are financial instruments that offer a return based on the return of some other asset. Exchange-traded contracts have standard terms and features and are traded usually at a futures or options exchange. OTC contracts are created by two parties anywhere else. In a futures contract, the futures exchange guarantees to each party that if the other fails to pay, the exchange will. The forward contract is an agreement between two parties to transfer (sell/buy) an asset at a future date at a price established at the start. It is largely a private and unregulated market.

A swap typically is like an agreement to buy at a future date, paying a fixed amount and receiving something of unknown future value. The most common use of a swap is a situation in which a corporation, currently borrowing at a floating rate, enters into a swap that commits it to making a series of interest payments to the swap counter party at a fixed rate, while receiving payments from the swap counter party at a rate related to the floating rate at which it is making loan payments. The floating components cancel, creating a conversion of the original floating-rate loan to a fixed-rate loan.

And on it goes, with lots of detail on valuing and use of derivatives.