Derivatives and Structured Products
Derivatives and Structured Products tests forwards, futures, options, swaps, margin, hedging, and retail structured products. The exam focuses on payoff logic, counterparty risk, leverage, and suitability-not on complex pricing models.
Core rules
- A derivative's value derives from an underlying asset, rate, index, or event.
- Futures are standardized and exchange-cleared; forwards are OTC and carry counterparty risk.
- Options give a right, not an obligation: calls benefit from rises, puts from falls; the buyer pays a premium and maximum loss is the premium.
- Swaps exchange cash flows; they can hedge rates or currencies but add counterparty and documentation risk.
- Margin is collateral, not a fee; leverage magnifies gains and losses.
- Structured products combine a fixed-income component with a derivative. 'Capital protection' may be conditional, at maturity only, and subject to issuer credit risk.
Worked example
An investor buys a call option with strike PHP 100 for a PHP 5 premium. At expiry, the underlying is PHP 120. Payoff = 120 − 100 = PHP 20. Profit = 20 − 5 = PHP 15. Breakeven = 100 + 5 = PHP 105. If the underlying is PHP 90, the option expires worthless and the loss is the PHP 5 premium. The payoff is not the profit; always subtract the premium.
Traps
Do not call derivatives inherently speculative-hedging is a legitimate use. Do not confuse payoff with profit. Do not ignore premium, margin calls, or counterparty risk. Do not treat a structured note as a deposit. Do not assume capital protection survives early redemption or issuer default.