https://gdpark.blog/tags/derivatives/Recent content in Derivatives on gdpark.blogHugoenSat, 17 Dec 2016 00:00:00 +0000https://gdpark.blog/posts/derivatives-01-introduction-to-derivatives/Thu, 13 Oct 2016 00:00:00 +0000https://gdpark.blog/posts/derivatives-01-introduction-to-derivatives/Kicking off a derivatives series with a skim of Hull Chapter 1 — futures vs. options, hedging vs. speculation, and the quiz-first study method.https://gdpark.blog/posts/financial-engineering-01-call-options-put-options/Thu, 01 Sep 2016 00:00:00 +0000https://gdpark.blog/posts/financial-engineering-01-call-options-put-options/A casual dive into call and put options — what they actually mean, why Black–Scholes blew the market wide open, and yes, there’s a dropped-class backstory involved.https://gdpark.blog/posts/derivatives-02-structure-of-futures-markets/Thu, 13 Oct 2016 00:00:00 +0000https://gdpark.blog/posts/derivatives-02-structure-of-futures-markets/A Q&A rundown of futures market basics — open interest, margin calls, stop vs. limit orders, and how hedgers and speculators get taxed differently.https://gdpark.blog/posts/financial-engineering-02-intrinsic-value-time-value-of-options/Thu, 01 Sep 2016 00:00:00 +0000https://gdpark.blog/posts/financial-engineering-02-intrinsic-value-time-value-of-options/Option value splits into two pieces — intrinsic value (the profit you’d lock in right now) and time value (all that probabilistic could-happen-later stuff) — here’s how they work.https://gdpark.blog/posts/derivatives-03-hedging-strategies-using-futures/Thu, 13 Oct 2016 00:00:00 +0000https://gdpark.blog/posts/derivatives-03-hedging-strategies-using-futures/A quiz-style walkthrough of futures hedging — short vs long hedges, basis risk, optimal hedge ratios, and beta reduction with index futures.https://gdpark.blog/posts/financial-engineering-03-put-call-parity/Wed, 07 Sep 2016 00:00:00 +0000https://gdpark.blog/posts/financial-engineering-03-put-call-parity/Before jumping into the binomial model, we lock in put-call parity — the neat reason knowing a European call’s price automatically pins down its put, and vice versa.https://gdpark.blog/posts/financial-engineering-04-binomial-model-one-period/Mon, 03 Oct 2016 00:00:00 +0000https://gdpark.blog/posts/financial-engineering-04-binomial-model-one-period/Breaking down the one-period Binomial Model — where stock prices only go up or down — and using that to price a call option with a risk-free portfolio.https://gdpark.blog/posts/derivatives-05-determining-forward-and-futures-prices/Sat, 15 Oct 2016 00:00:00 +0000https://gdpark.blog/posts/derivatives-05-determining-forward-and-futures-prices/A quiz-style rundown of how forward and futures prices actually work — short selling, convenience yield, cost of carry, and why copper isn’t gold.https://gdpark.blog/posts/financial-engineering-05-binomial-model-two-period/Mon, 03 Oct 2016 00:00:00 +0000https://gdpark.blog/posts/financial-engineering-05-binomial-model-two-period/We crank through the two-period binomial model one step at a time, build up the call price formula, and peek at how it naturally generalizes to n periods — heh heh.https://gdpark.blog/posts/financial-engineering-06-binomial-model-generalized-n-period/Mon, 03 Oct 2016 00:00:00 +0000https://gdpark.blog/posts/financial-engineering-06-binomial-model-generalized-n-period/We tackle the scary-looking generalized n-period binomial formula and break it down piece by piece — p, u, d, sigma notation and all.https://gdpark.blog/posts/derivatives-07-fundamentals-of-interest-rate-swaps/Wed, 19 Oct 2016 00:00:00 +0000https://gdpark.blog/posts/derivatives-07-fundamentals-of-interest-rate-swaps/A casual walkthrough of how interest rate swaps actually work — fixed vs. floating rates, notional principal, and why companies would sign up for this in the first place.https://gdpark.blog/posts/financial-engineering-07-american-options/Mon, 03 Oct 2016 00:00:00 +0000https://gdpark.blog/posts/financial-engineering-07-american-options/Breaking down the one chunky difference between American and European options — early exercise — and how it flips the whole binomial pricing tree on its head.https://gdpark.blog/posts/derivatives-08-swaps/Mon, 21 Nov 2016 00:00:00 +0000https://gdpark.blog/posts/derivatives-08-swaps/A casual breakdown of how interest rate swaps work — exchanging fixed and floating payments on a notional principal, and why anyone would actually do that.https://gdpark.blog/posts/derivatives-09-swaps-practice-problems/Tue, 22 Nov 2016 00:00:00 +0000https://gdpark.blog/posts/derivatives-09-swaps-practice-problems/Working through classic swap design problems — comparative advantage, LIBOR discounting, and currency swaps — with the actual numbers worked out step by step.https://gdpark.blog/posts/derivatives-10-options/Mon, 28 Nov 2016 00:00:00 +0000https://gdpark.blog/posts/derivatives-10-options/A casual intro to options — call vs. put, why theoretical prices even matter, and how Black-Scholes blew the whole market wide open.https://gdpark.blog/posts/financial-engineering-10-black-scholes-formula/Thu, 20 Oct 2016 00:00:00 +0000https://gdpark.blog/posts/financial-engineering-10-black-scholes-formula/Can’t derive Black-Scholes to save my life, but coding up the call and put pricing formula in VBA? That part’s actually not hard at all.https://gdpark.blog/posts/derivatives-11-properties-of-stock-options/Mon, 28 Nov 2016 00:00:00 +0000https://gdpark.blog/posts/derivatives-11-properties-of-stock-options/Breaking down every variable that moves option prices — S, K, T, σ, r, and D — and why European vs. American options handle time to expiration differently.https://gdpark.blog/posts/derivatives-12-options-practice-problems/Mon, 28 Nov 2016 00:00:00 +0000https://gdpark.blog/posts/derivatives-12-options-practice-problems/Working through options pricing problems — lower bounds on calls and puts, why American options always beat intrinsic value, and when put-call parity breaks down.https://gdpark.blog/posts/derivatives-13-options-trading-strategies-part-1-spreads-bull-spread-bear-s/Wed, 14 Dec 2016 00:00:00 +0000https://gdpark.blog/posts/derivatives-13-options-trading-strategies-part-1-spreads-bull-spread-bear-s/We finally stop staring at one lonely option and start building real portfolios — covered calls, protective puts, and every spread you’d want to know.https://gdpark.blog/posts/financial-engineering-13-implied-volatility/Fri, 09 Dec 2016 00:00:00 +0000https://gdpark.blog/posts/financial-engineering-13-implied-volatility/Flip the BS formula backwards — plug in the real market price, leave σ blank, and whatever volatility makes it work? That’s implied volatility, baby.https://gdpark.blog/posts/derivatives-15-binomial-option-pricing-model-basics/Wed, 14 Dec 2016 00:00:00 +0000https://gdpark.blog/posts/derivatives-15-binomial-option-pricing-model-basics/A copy-paste deep dive into the binomial option pricing model — covering one-period basics, risk-free portfolios, and how to pin down a call option’s theoretical price.https://gdpark.blog/posts/financial-engineering-15-newton-raphson-method/Mon, 12 Dec 2016 00:00:00 +0000https://gdpark.blog/posts/financial-engineering-15-newton-raphson-method/We ditch bisection and let Newton-Raphson chase down implied volatility by hopping along tangent lines until it zeros in on the answer.https://gdpark.blog/posts/derivatives-16-deriving-the-black-scholes-formula-from-the-binomial-model/Thu, 15 Dec 2016 00:00:00 +0000https://gdpark.blog/posts/derivatives-16-deriving-the-black-scholes-formula-from-the-binomial-model/Turns out if you just crank n to infinity in the binomial model, the Black-Scholes formula pops right out — so let’s do exactly that instead of going the hard way.https://gdpark.blog/posts/derivatives-18-stock-index-options-and-currency-options/Fri, 16 Dec 2016 00:00:00 +0000https://gdpark.blog/posts/derivatives-18-stock-index-options-and-currency-options/Extending Black-Scholes to handle dividends, stock index options, and currency options — turns out it’s basically the same trick each time.https://gdpark.blog/posts/derivatives-19-stock-index-options-and-currency-options-practice-problems/Sat, 17 Dec 2016 00:00:00 +0000https://gdpark.blog/posts/derivatives-19-stock-index-options-and-currency-options-practice-problems/Practice problems on currency and stock index options — lower bounds, put-call parity, Black-Scholes puts, and hedging a portfolio with index puts.https://gdpark.blog/posts/derivatives-20-the-greeks/Sat, 17 Dec 2016 00:00:00 +0000https://gdpark.blog/posts/derivatives-20-the-greeks/A casual walkthrough of why hedging exists and a few ‘dumb’ strategies before the real stuff — delta hedging — explained like chatting with someone in the field.https://gdpark.blog/posts/derivatives-21-the-greeks-practice-problems/Sat, 17 Dec 2016 00:00:00 +0000https://gdpark.blog/posts/derivatives-21-the-greeks-practice-problems/Working through Greeks practice problems — stop-loss strategies, futures option deltas, and hedging a short call position on silver futures.