DER 02 Valuation tools

Three sets of valuation tools are critical to understanding derivatives contract valuation and risk management. These concepts are depend on economic intuition, and knowledge of basic statistics and interest rate mechanics.

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â€‹DER 02.1 Valuation-by-replication

â€‹Derivatives contract valuation and risk management depends on a single key economic assumption—individuals prefer more wealth to less wealth. If they do, the perfect substitutes must have the same price.

DER 02.2 Return-risk measurement

Derivatives contract valuation and risk management depends the return/risk characteristics of the underlying asset return distribution. Understanding how to characterize return distributions is critical.

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DER 02.3 Bond valuation mechanics

Derivatives contract valuation and risk management depends on zero-coupon interest rates of various maturities. Understanding interest rate basics and available sources of data is helpful.

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