Chapter 1 Primer on Derivatives
Learning to use derivatives is a bit like developing an athletic or musical skill. The key to success is understanding the fundamentals. This chapter focuses on the two most important derivative instruments, forwards and options, and explains how they are like Lego blocks in the sense that they are useful by themselves and for constructing more sophisticated structures.
What Are Derivatives?
A derivative contract is an agreement between two or more parties (also known as counterparties), whose value is based on movements in the price of an agreed-upon underling asset or factor, such as a stock, bond, currency, credit rating, or index. It is called a “derivative” because changes in its value are derived from changes ...