/ PFT Online Course on 'FUNDAMENTALS OF THE DERIVATIVE
Introduction and Background
futures (= formalised forward contracts), swaps, options, hybrids
(such as swaptions and options on futures) and a category "other"
(including credit derivatives and weather derivatives) make up the
derivative markets (also called forward markets). The word is drawn
from "derive" and means that the derivative instrument
cannot exist on its own; it is closely related to "something"
and this something is usually a cash (spot) market instrument and
it is called the underlying instrument.
A cash or spot deal is a deal for settlement
now. "Now" means the earliest date dictated by market
conventions / characteristics. For example, in the money market
a treasury bill sale transacted today can be settled today (T+0)
or tomorrow (T+1). In the equity market deals are usually settled
on T+3 or T+5. In the bond market deals are usually settled on T+3
and so on.
In the forward markets (as seen, this
is also a generic term for all derivatives) settlement takes place
on dates in the future other than on the spot settlement dates.
For example, futures normally expire on dates 3 months, 6 months,
9 months and 12 months into the future (from when they are created).
To elucidate an example is required:
a long futures contract on100 shares of ABC Company (called a single
stock future) expiring in 85 days' time. The underlying instrument
is Company ABC shares.
You have the choice of buying the100
shares of Company ABC today (T+0) at the market price of LCC 10.00
(= spot or cash price) and pay on T+3, or to buy a future (futures
contract actually) now (T+0) at a price of LCC10.30 that expires
in 85 days' time on T+85. It should be clear that you undertake
to buy and pay LCC10.30 per share for 100 shares of Company ABC
on T+85.To summarise: you deal on T+0 at a price agreed now (LCC10.30)
and settle the deal on T+85.
What is the difference between the
spot price and the forward (or futures) price? The difference is
determined by market forces, but it should be equal to the time
value of money: the spot price is the present value (PV) and the
forward price the future value (FV). If not, in theory, arbitrage
should take place.
As noted, a future is a formalised
forward. A swap is the exchange of obligations (floating interest
/ price for fixed interest / price). An option is well termed: it
is an option (no obligation) to buy or sell an underlying asset.
The other derivatives are based on events taking place.
Derivatives were originally developed
as hedging tools (against price risk), but they are used extensively
as tools to speculate in the various underlying markets. The term
"speculate" is usually met with disdain. If you react
this way, consider who enables the hedger to hedge - it is usually
the speculator. The hedger sheds risk and the speculator takes it
The course covers all of the above
and provides many examples to enable the student to develop an integrated
understanding of these significant markets
(local country currency) is a fictitious currency.
||when slots are full
||November 8 to December 17,
||Minimum of 35 hours
||US $ 400/-
||UNITAR Geneva (Course Administration
and Technical Questions)
The overall objectives of the course are to:
- Expose the student to the context
of the derivative markets: the financial system and its markets.
- Equip the student with the theoretical
backdrop to the derivative markets: the time value of money and
the arbitrage principle.
- Provide the student with the means
to analyse the essential characteristics of each derivative market.
- Provide the student with the ability
to calculate the fair value prices of the derivative instruments.
- Expose the student to the participants
in the derivative markets and their motivation/s.
The intended audience is:
- Members and employees of securities
- Dealers in other parts of the financial
- Financial market analysts.
- Company treasury managers and dealers.
- Employees of treasury management
- Private sector bankers.
- Central bankers.
- Government treasury officials.
- Large investors, such as retirement
- Trustees of retirement funds.
- Corporate borrowers.
- Commodity manufacturers.
After completing the course the student should / should be able
- Elucidate the context of the derivatives
markets: the financial system
- Comprehend the instruments (contract
types) of the derivative markets.
- Discuss the derivative markets in
terms of their theoretical underpinnings.
- Analyse the derivative markets in
terms of their use by the various participants.
Structure / Outline
This online course will involve a mix
of self-study and online interaction culminating in a practical
understanding of money market through online group work. Throughout
the duration of the course, participants will go through theoretical
and conceptual material prepared by UNITAR and will have an opportunity
to relate it to real-life situations through online discussions
and peer-to-peer interaction. There will be a quiz/assignment at
the end of the course which is a requirement for obtaining a course
Module 1 Derivative Markets: Context
A description (including illustrations) of the elements that
constitute the financial system is presented. This is the setting
of the derivative markets. The underlying instruments of the financial
derivative markets, as well as their prices / indices, are found
in the various financial markets
Module 2 Derivative Markets: Forwards
This module presents detailed descriptions of the characteristics
of the various types of forward contracts. Forward contracts are
found in the debt, equity, forex and commodity markets. The organisational
structure of the forward markets is elucidated as well as the
underlying pricing principles.
Module 3 Derivative Markets: Futures
This module is given much attention because of the significance
of futures markets around the world. It dissects the definition
of futures, and describes all aspects of the futures market, including
types of futures contracts (found in all markets), organisational
structure, margining, cash versus physical settlement, the pricing
of futures (which differs according to the underlying instrument),
the participants, the economic significance of futures markets
and so on.
Module 4 Derivative Markets: Swaps
In a swap contract certain cash flows are exchanged for other
cash flows (for example fixed for floating) based on a notional
amount that is not exchanged. In the case of a hedger the notional
amount will mirror a cash market position. This module covers
all swaps: interest rate swaps, currency swaps, equity swaps and
commodity swaps. It also covers the organisational structure of
the generic swap market.
Module 5 Derivative Markets: Options
An option, as the name suggests, is a right, without the obligation,
to buy or sell the underlying instrument. This is done (called
exercise) if it is profitable for the holder (buyer) to do so.
Otherwise the holder lets the option lapse. The price paid for
the option is called a premium because it is akin to an insurance
policy; this, ie option pricing, is given much attention. The
organisational structure of the generic options market is also
covered, as are the various options markets: on debt, forex, currencies,
commodities and other derivatives (futures, swaps and so on).
Module 6 Derivative Markets: Other
There are a number of other derivative instruments, such as
securitisation assets, credit derivatives, weather derivatives,
insurance derivatives, electricity derivatives and so on. The
main ones are the first three. They are covered in some detail.
This course will be conducted over the internet using UNITAR's e-Learning
infrastructure for a five-week period. Participants will require a
minimum of 90 minutes of study each day. The course pedagogy will
allow for three levels of interaction. At the first level, the participants
will interact with the training content. At the second level, the
participants will interact with other participants to share experiences
and learn in a contextual manner (using an online discussion board
facility). At the third level, the participants will interact with
a seasoned international negotiator (course mentor) who will moderate
the course for its entire duration. At the core of this course is
a set of online interactions and discussions, each of which will be
coached by an expert.
UNITAR online courses attempt to create
a networked learning environment, in which participants have the
flexibility to learn at their own convenience and pace but also
are able to interact with peers and experts through the discussion
This online course will be conducted
in the English language.
This course is designed as an online course in which participants
will be primarily responsible for their own learning. Each lesson
will consist of the following components:
Reading Materials (Compulsory Reading Materials):
these materials are intended to educate the participants
about the basic concepts and principles applicable to the subject-matter
of the lesson. It will include, where appropriate, sample materials.
These materials will constitute the required reading materials
for the lesson
Reading Materials (Optional Reading Materials): this
will consist of optional reading materials for participants who
wish to learn more about the topic than what is covered in the
Links: This will refer the interested participants
to additional books, articles, documents, and websites that deal
with the issues raised in the lesson.
A glossary of terms tailored to the online course will
be provided to the participants and act as a learning support
during the entire course.
At the end of each lesson there will be a set of quizzes
for participants to answer. These quizzes are designed to test
the participant's understanding of the lesson. Participants are
required to pass each quiz and obtain at least 80% or more passing
grade in order to be eligible for a certificate. All quizzes will
need to be taken online.
Discussion Board: There will be a community discussion
board available on which participants can post questions or comments
that can be seen by the instructor and the other participants.
This discussion board will be moderated by the course director
and UNITAR. Structured discussion strings will be posted on a
All successful participants will be
eligible to a certificate after completion of this online course.