- CFA Level 2: Derivatives Part 2 – Introduction
- Introduction to Options
- Synthetic Options and Rationale
- One Period Binomial Option Pricing Model
- Call Option Price Formula
- Binomial Interest Rate Options Pricing
- Black-Scholes-Merton (BSM) Option Pricing Model
- Black-Scholes-Merton Model and the Greeks
- Dynamic Delta Hedging & Gamma Related Issues
- Estimating Volatility for Option Pricing
- Put-Call Parity for Options on Forwards
- Introduction to Swaps
- Plain Vanilla Interest Rate Swap
- Equity Swaps
- Currency Swaps
- Swap Pricing vs. Swap Valuing
- Pricing and Valuing a Plain Vanilla Interest Rate Swap
- Pricing and Valuing Currency Swaps
- Pricing and Valuing Equity Swaps
- Swaps as Theoretical Equivalents of Other Derivatives
- Swaptions and their Valuation
- Swap Credit Risk and Swap Spread
- Interest Rate Derivatives - Caps and Floors
- Credit Default Swaps (CDS)
- Credit Derivative Trading Strategies
Credit Derivative Trading Strategies
Basis Trades: Made based on the difference between a bond's yield and the CDS premium.
Flattener: Buy the short term CDS and sell the long term CDS
Steepener: Sell the short term CDS and buy the long term CDS
Index Trades: An investor can buy or sell a credit index
CDS Basket Trades (or Correlation Trades): Credit protection can be sold on an entire portfolio of bonds; the seller pays only for the individual issue that defaulted and the basket continues.
First to Default Baskets: seller will deliver the entire notional amount of the basket once the first default takes place.
Payer Options: Provide the option holder the right to buy credit protection in the future.
Receiver Options: Provide the option holder the right to sell credit protection in the future.
Capital Structure Trades: Designed to exploit mispricings in a company's capital structure.
For example, if a trader expects a company to increase its leverage and does not feel that this has been appropriately priced in the market, then he/she may buy a CDS and buy a long stock call option (in order to make money if the stock rises).
Other capital structure trades may involve taking a long position on the CDS for one debt issue by a company and taking a short position in another debt issue by the same company.