- CFA Exams
- Dec. 2020 Level 1
- Study Session 16. Derivatives
- Reading 49. Basics of Derivative Pricing and Valuation

### Reading 49. Basics of Derivative Pricing and Valuation

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### Learning Outcome Statements

Reading 49. Basics of Derivative Pricing and Valuation | |
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1. The Principle of Arbitragea. explain how the concepts of arbitrage, replication, and risk neutrality are used in pricing derivatives; | |

2. The Concept of Pricing vs. Valuationb. distinguish between value and price of forward and futures contracts; | |

3. Pricing and Valuation of Forward Contractsc. explain how the value and price of a forward contract are determined at expiration, during the life of the contract, and at initiation;
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4. Forward Rate Agreementse. 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 Contractsg. explain how swap contracts are similar to but different from a series of forward contracts;
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7. The Value of a European Option at Expirationi. explain how the value of a European option is determined at expiration;
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8. Factors that Affect the Value of an Optionk. identify the factors that determine the value of an option and explain how each factor affects the value of an option; | |

9. Put-Call Parityl. explain put-call parity for European options; | |

10. Put-Call-Forward Paritym. explain put-call-forward parity for European options; | |

11. Binomial Valuation of Optionsn. explain how the value of an option is determined using a one-period binomial model; | |

12. American Option Pricingo. explain under which circumstances the values of European and American options differ. |