Forward Commitment and Contingent Claim Features and InstrumentsLocked: included in All Access

The main derivative instruments and how they pay off: forwards, futures and swaps as firm commitments with linear payoffs, options and credit default swaps as contingent claims with one-sided payoffs, the value and profit of long and short calls and puts at expiration, and how a forward compares with a call or a short put on the same underlying.

1. 1. Forward contracts and firm commitmentsA forward locks in today the price at which one party will buy and the other will sell an underlying on a future date, so at maturity one side's gain is exactly the other side's loss.Locked: included in All Access11 min
2. 2. Futures contracts and daily settlementA futures contract is a standardized forward traded on an exchange, where a clearinghouse settles gains and losses every day through margin accounts and guarantees performance.Video · 6 minLocked: included in All Access13 min
3. 3. Swaps as a series of forwardsA swap is a firm commitment to exchange a series of cash flows, most often fixed interest for floating interest on a notional amount, which makes it a bundle of forward exchanges.Video · 6 minLocked: included in All Access11 min
4. 4. Options and call payoffsAn option gives its buyer the right, but not the obligation, to buy (call) or sell (put) at a fixed price, so the buyer's payoff can never be negative and the buyer pays a premium for that.Video · 6 minLocked: included in All Access13 min
5. 5. Put payoffs and the four option positionsA put pays off when the price falls below the exercise price; because a price cannot drop below zero, every put position has a limited best and worst case, unlike a short call.Video · 6 minLocked: included in All Access12 min
6. 6. Credit default swapsA credit default swap lets one party pay a fixed spread to another in return for compensation if a third-party issuer suffers a credit event, transferring default risk without trading the bonds.Video · 5 minLocked: included in All Access11 min
7. 7. Forward commitments versus contingent claimsForwards and options can give similar exposure to an underlying, but a forward's payoff is linear and costs nothing up front, while an option trades a premium for a payoff that is cut off on one side.Video · 5 minLocked: included in All Access12 min