Introduction to Derivatives

Introduction to Derivatives



Introduction to Derivatives

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Course Overview


Derivatives now play a significant role in the investment portfolio, whether they are used as a key risk management tool or provide liquid alternatives to gain market exposures. Understanding how derivatives work, what markets they are relevant to and possessing a comprehension of the concepts behind derivatives is of fundamental importance in the new age of the investment industry.


Too many within the industry consider derivatives as complicated, if only because they view the jargon as alien. This half-day course aims to demystify the terminology used in the marketplace and promote an awareness of the concepts behind derivatives. It also provides an understanding of the different types of instruments and how investment managers use them to assist in achieving the risk and return objectives for client portfolios.

Learning Objectives


  • Provide a clear understanding of the terminology and the concepts behind derivatives.
  • Cover the fundamental knowledge you need to know about derivatives.
  • Understand why derivatives are used as well as or in place of cash assets.
  • Be aware of how derivatives are used by investment managers and illustrate simple portfolio examples of how they are used in the portfolio.
  • Recognise the difference between Exchange Trade and Over-The-Counter (OTC) products.
  • Offer an insight into the different derivative instruments used such as futures, swaps and options and the potential risks involved.



  • Derivatives Market Overview

– Definition of a derivative and the underlying markets

– Differentiating derivatives from traditional cash market products

– Derivative execution – how they are traded: exchange traded vs. OTC

– Types of derivatives – forwards and futures, swaps and options

– Size of the derivatives markets and the market participants


  • Derivative Products – Forwards, Futures and Swaps

– Futures and forward contracts – exchange traded vs. Over-The-Counter (OTC)

○ Review of the contract definitions and mechanics

○ The concept of margin

○ Role of the clearing house

○ Portfolio applications – hedging using equity index futures and currency forwards to mitigate market risks


– Swap contracts

○ What are they? – why use swaps and how they differ from exchange traded futures

○ Cash flows and mechanics

○ Portfolio applications – equity swaps, interest rate swaps (IRS), currency swaps and credit default swaps (CDS)


  • Case study – using forward, futures and swaps in a portfolio


  • Derivative Products – Options

– Options fundamentals and terminology – calls vs. puts and intrinsic value vs. time value

○ Different option styles – American vs. European options

○ Option pay off diagrams

○ Why use options over futures and forwards?


  • Case study – using options in a portfolio


  • Derivatives in the Portfolio Summary

– Overview of how derivatives are used by investment managers

– Advantage and disadvantages summarised

– A brief look at: asset allocation, index-linked funds and absolute return strategies



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Introduction to Derivatives

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