CFA Refresher Readings
Derivative Instruments: Study Session 16
Learning Outcome Statements
“Forward Markets and Contracts”
The practitioner should be able to:
- Explain how the value of a forward contract is determined at initiation, during the life of the contract, and at expiration
- Calculate and interpret the price and the value of an equity forward contract, assuming dividends are paid either discretely or continuously
- Calculate and interpret the price and the value of 1) a forward contract on a fixed income security, 2) a forward rate agreement (FRA), and 3) a forward contract on a currency
- Evaluate credit risk in a forward contract, and explain how market value is a measure of the credit risk to a party in a forward contract
“Futures Markets and Contracts”
The practitioner should be able to:
- Explain why the futures price must converge to the spot price at expiration
- Determine the value of a futures contract
- Explain how forward and futures prices differ
- Identify the different types of monetary and non-monetary benefits and costs associated with holding the underlying asset, and explain how they affect the futures price
- Describe backwardation and contango
- Discuss whether futures prices equal expected spot prices
- Describe the difficulties in pricing Eurodollar futures and creating a pure arbitrage opportunity
- Calculate and interpret the price of Treasury bond futures, stock index futures, and currency futures