Category Archive : Derivatives

Learn what a Swap Execution Facility (SEF) is, how Dodd-Frank changed OTC derivatives, and how CCP clearing, margin, and swap trading work.

Understand the expected future spot rate, how it differs from the forward exchange rate, and how UIP, PPP, interest rates, and carry trades connect in CFA Economics.

Learn how time value decay affects option prices, why theta accelerates near expiration, how moneyness matters, and how volatility changes option decay.

Understand the Federal Funds Rate, how the Fed uses it to control monetary policy, and its impact on bonds, stocks, currencies, inflation, and global markets.

Learn how interest rate collars combine a purchased cap and sold floor to limit floating-rate borrowing costs, reduce the upfront hedging premium, and create a zero-cost collar by giving up some benefit from falling rates.

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Learn what Over-the-Counter (OTC) derivatives are, their meaning, types, examples, benefits, risks, and how they differ from exchange-traded derivatives.

Learn what a non dividend paying stock is, how it affects valuation models, option pricing, and investor returns, and why the absence of dividends matters in CFA and FRM exams.

Understand what arbitrage free means in finance, why riskless profit opportunities cannot persist, and how arbitrage-free pricing underpins derivatives and valuation models.

Learn what counterparty credit risk is, how it differs from traditional credit risk, and how collateral, netting, and central clearing reduce exposure in derivatives markets.

Binomial option pricing model explained step by step for CFA and FRM. Understand risk-neutral probability, backward induction, and American vs European option valuation.

Risk-neutral probability explained for CFA and FRM. Learn how no-arbitrage pricing works in binomial models, option valuation, and why pricing ignores real-world probabilities.

Spot price explained clearly. Learn what spot price means, how it differs from future price, its role in arbitrage, cost of carry, and derivative pricing for CFA & FRM exams.

Cost of carry explained intuitively. Learn what cost of carry means, its components, positive vs negative carry, and how it drives futures and forward pricing for CFA & FRM exams.

Future price explained clearly. Learn what future price represents, how it relates to spot price, cost of carry logic, no-arbitrage pricing, and key CFA & FRM exam concepts.

Binomial option model explained step by step. Learn how binomial trees value call and put options, risk-neutral probabilities, backward induction, and why the model is key for CFA and FRM exams.

Call option explained clearly. Learn what a call option is, how its payoff and profit work, buyer vs seller risk, early exercise logic, and key exam concepts for CFA and FRM.

Put option explained clearly. Learn what a put option is, how its payoff works, the difference between payoff and profit, buyer vs seller risk, and key exam concepts for CFA and FRM.

Why should an American call option on a non-dividend-paying stock never be exercised early? Understand the intuition, time value, dominance argument, and interest rate logic behind this key option pricing result.