Tutorial lessons
03 Financial Markets and Products
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Lessons
Tutorial lessons
FMP 1: Banks
Commercial banking vs investment banking: what each one does Banks sit at the centre of the world financial system, and in most countries their work falls into two broad trades. Commercial banking is
FMP 2: Insurance Companies and Pension Plans
Life insurance and property and casualty insurance: the two main categories An insurance contract sells protection against a named adverse event. The buyer is the policyholder, and the price is paid i
FMP 3: Fund Management
Why investors pool money into funds, and how open-end mutual funds work Money handed to a professional rarely sits in an account of its own. It is pooled with money from other clients, and the manager
FMP 4: Introduction to Derivatives
What a derivative is, and how linear and non-linear derivatives differ A derivative is a contract whose value is worked out from something else: an equity price, an exchange rate, an interest rate, a
FMP 5: Exchanges and OTC Markets
What an exchange is and how margin reduces counterparty risk An exchange is an organisation with members who trade with each other, and for a long stretch of history that was nearly the whole of it. T
FMP 6: Central Clearing
What a central counterparty is and how a CCP clears a trade A central counterparty, usually shortened to CCP and often called a clearing house, steps into the middle of a trade so the two firms who ag
FMP 7: Futures Markets
How a futures exchange works and what the exchange does A futures contract commits two parties to trade an asset on a future date at a price fixed today. What sets it apart from a private agreement is
FMP 8: Using Futures for Hedging
What a short hedge is and how to calculate its profit and loss Futures serve two opposite purposes, and which one applies depends on what the trader already owns. A firm exposed to an exchange rate, a
FMP 9: Foreign Exchange Markets
How a currency quote works: base currency, quote currency and quote direction Currency trading is the largest market anywhere by notional turnover. The Triennial Central Bank Survey run by the Bank fo
FMP 10: Pricing Financial Forwards and Futures
What a financial asset is and how it differs from a consumption asset A forward contract fixes today the price for a trade that settles later, and no-arbitrage reasoning, not a forecast of the deliver
FMP 11: Commodity Forwards and Futures
How commodities differ from financial assets On paper a forward contract on a barrel of oil and a forward contract on a share of stock look like the same animal. The pricing logic behind them is not t
FMP 12: Options Markets
What call options and put options are, and how an option differs from a futures contract An option hands one side a right and leaves the other holding an obligation. A call option gives its buyer the
FMP 13: Properties of Options
The six factors that affect an option price Six quantities drive what a stock option is worth: the strike price, the price of the stock beneath it, the risk-free rate, how volatile that stock is, how
FMP 14: Trading Strategies
Put-call parity and the four ways to combine an option with the underlying asset Give a trader European options at every strike price and almost any payoff shape becomes reachable, provided it depends
FMP 15: Exotic Options
What exotic options are and how they differ from plain vanilla options Listed contracts come in two shapes. A European option is exercisable only at maturity, an American option at any moment up to it
FMP 16: Properties of Interest Rates
Treasury rates, repo rates and what the risk-free rate means An interest rate is what a lender earns for parting with money for a while, and two things move it more than anything else. Credit risk com
FMP 17: Corporate Bonds
How corporate bonds are issued: private placement versus public issue A bond is a loan wearing the clothes of a tradable security. The company borrows and the bondholders lend, against a promise of in
FMP 18: Mortgages and Mortgage-Backed Securities
Types of residential mortgage products: fixed-rate and adjustable-rate mortgages A mortgage is a loan secured on property, residential or commercial, and a mortgage-backed security is an investment ma
FMP 19: Interest Rate Futures
Day count conventions: actual/actual, 30/360 and actual/360 explained Interest on a bond arrives in lumps on coupon dates, so whenever a bond changes hands between two of those dates somebody must dec