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FRM-1 Study Notes

Introduction – Derivatives

  • Derivatives are financial instruments which derive their value from an underlying asset and some other variables such as interest rates, volatilities etc.
  • Futures, forwards, options and swaps are some of the most common examples of derivatives
  • The underlying asset: It is a more basic financial instrument. Example: stocks, bonds, interest rate, commodity etc.
  • Example of a derivative: Option:
    • An investor owns a call option (which is a derivative) whose underlying asset is the common stock of a company A. This option gives the investor, the right to buy the stock at a certain predefined price on or before a future date

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