Learning Outcome Statements

1. The Principle of Arbitrage

a. explain how the concepts of arbitrage, replication, and risk neutrality are used in pricing derivatives;

2. The Concept of Pricing vs. Valuation

b. distinguish between value and price of forward and futures contracts;

3. Pricing and Valuation of Forward Contracts

c. explain how the value and price of a forward contract are determined at expiration, during the life of the contract, and at initiation;

d. describe monetary and nonmonetary benefits and costs associated with holding the underlying asset and explain how they affect the value and price of a forward contract;

4. Forward Rate Agreements

e. define a forward rate agreement and describe its uses;

5. Why do Forward and Futures Prices Differ?

f. explain why forward and futures prices differ;

6. Pricing and Valuation of Swap Contracts

g. explain how swap contracts are similar to but different from a series of forward contracts;

h. distinguish between the value and price of swaps;

7. The Value of a European Option at Expiration

i. explain how the value of a European option is determined at expiration;

j. explain the exercise value, time value, and moneyness of an option;

8. Factors that Affect the Value of an Option

k. identify the factors that determine the value of an option and explain how each factor affects the value of an option;

9. Put-Call Parity

l. explain put-call parity for European options;

10. Put-Call-Forward Parity

m. explain put-call-forward parity for European options;

11. Binomial Valuation of Options

n. explain how the value of an option is determined using a one-period binomial model;

12. American Option Pricing

o. explain under which circumstances the values of European and American options differ.