2) Insurance Companies and Pension Plans

After completion of this topic you will be able to

• Describe the key features of the various categories of insurance companies and identify the risks facing insurance companies
• Describe the use of mortality tables and calculate the premium payment for a policy holder
• Calculate and interpret loss ratio, expense ratio, combined ratio and operating ratio for a property-casualty insurance company
• Describe moral hazard and adverse selection risks facing insurance companies, provide examples of each and describe how to overcome the problems
• Distinguish between mortality risk & longevity risk and describe how to hedge these risks
• Evaluate the capital requirements for life insurance and property-casualty insurance companies
• Compare the guaranty system and the regulatory requirements for insurance companies with those for banks
• Describe a defined benefit plan and a defined contribution plan for a pension fund and explain the differences between them

3) Mutual Funds and Hedge Funds

After completion of this topic you will be able to

• Differentiate among open-end mutual funds, closed-end mutual funds and exchange-traded funds (ETFS)
• Calculate the net asset value (NAV) of an open-end mutual fund
• Explain the key differences between hedge funds and mutual funds
• Calculate the return on a hedge fund investment and explain the incentive fee structure of a hedge fund including the terms hurdle rate, high-water mark and clawback
• Describe various hedge fund strategies, including long/short equity, dedicated short distressed securities, merger arbitrage, convertible arbitrage, fixed income arbitrage, emerging markets, global macro, and managed futures and identify the risks faced by hedge funds
• Describe hedge fund performance and explain the effect of measurement biases on performance measurement

4) Introduction (Options, Futures, and Other Derivatives)

After completion of this topic you will be able to

• Describe the over-the-counter market, distinguish it from trading on an stages
• Differentiate between options, forwards, and futures contracts
• Identify and calculate option and forward contract payoffs
• Calculate and compare the payoffs from hedging strategies involving contracts and options
• Calculate and compare the payoffs from speculative strategies involving future options
• Calculate an arbitrage payoff and describe how arbitrage opportunities are temporary
• Describe some of the risks that can arise from the use of derivatives.

5) Mechanics of Futures Markets

• Define and describe the key features of a futures contract, including the asset contract price and size, delivery, and limits
• Explain the convergence of futures and spot prices
• Describe the rationale for margin requirements and explain how they work
• Describe the role of a clearinghouse in futures and over-the-counter market transactions
• Describe the role of collateralization in the over-the-counter market and com to the margining system
• Identify the differences between a normal and inverted futures market
• Describe the mechanics of the delivery process and contrast it with cash settle
• Evaluate the impact of different trading order types
• Compare and contrast forward and futures contracts

6) Hedging Strategies Using Futures

• Define and differentiate between short and long hedges and identify their appropriate uses
• Describe the arguments for and against hedging and the potential impact of hedging on profitability
• Define the basis and explain the various sources of basis risk, and explain how basis risks arise when hedging with futures
• Define cross hedging compute and interpret the minimum variance hedge ratio and hedge effectiveness
• Compute the optimal number of futures contracts needed to hedge an exposure and explain and calculate the "tailing the hedge" adjustment
• Explain how to use stock index futures contracts to change a stock portfolio beta
• Explain the term "rolling the hedge forward" and describe some of the risks that arise from this strategy

7) Interest Rates

After completion of this topic you will be able to

• Describe the key factors the led to the housing bubble
• Explain the banking industry trends leading up to the liquidity squeeze and assess the triggers for the liquidity crisis
• Explain how banks created collateralized debt obligations
• Explain the purposes and uses of credit default swaps
• Describe how securitized and structured products were used by investor groups and describe the consequences of their increased use
• Describe how the financial crisis triggered a series of worldwide financial and economic consequences
• Distinguish between funding liquidity and market liquidity and explain how the evaporation of liquidity can lead to a financial crisis
• Analyze how an increase in counterparty credit risk can generate additional funding needs and possible systemic risk

8) Determination of Forward and Futures Prices

After completion of this topic you will be able to

• Differentiate between investment and consumption assets
• Define short-selling and calculate the net profit of a short sale of a dividend paying stock
• Describe the differences between forward and future contracts and explain the relationship
between forward and spot prices
• Calculate the forward price given the underlying asset's spot price and describe an arbitrage argument between spot and forward prices
• Explain the relationship between forward and futures prices
• Calculate a forward foreign exchange rate using the interest rate parity relationship
• Define income, storage costs, and convenience yield
• Calculate the futures price on commodities incorporating income/storage costs and/ or convenience yields
• Calculate, using the cost-of-carry model, forward prices where the underlying asset cither does or does not have interim cash flows
• Describe the various delivery options available in the futures markets and how they can influence futures prices
• Explain the relationship between current futures prices and expected future spot prices, including the impact of systematic and nonsystematic risk
• Define and interpret contango and backwardation, and explain how they relate to the cost-of-carry model

9) Interest Rate Futures

After completion of this topic you will be able to

• Identify the most commonly used day count conventions, describe the markets that each one is typically used in, and apply each to an interest calculation
• Calculate the conversion of a discount rate to a price for a US Treasury bill
• Differentiate between the clean and dirty price for a US Treasury bond; calculate the accrued interest and dirty price on a US Treasury bond
• Explain and calculate a US Treasury bond futures contract conversion factor
• Calculate the cost of delivering a bond into a Treasury bond futures contract
• Describe the impact of the level and shape of the yield curve on the cheapest-to deliver Treasury bond decision
• Calculate the theoretical futures price for a Treasury bond futures contract
• Calculate the final contract price on a Eurodollar future contract
• Describe and compute the Eurodollar futures contract convexity adjustment
• Explain how Eurodollar futures can be used to extend the LIBOR zero curve
• Calculate the duration-based hedge ratio and create a duration based hedging rategy using interest rate futures
• Explain the limitations of using a duration-based hedging strategy

10) Swaps

After completion of this topic you will be able to

• Explain the mechanics of a plain vanilla interest rate swap and compute its cash flows
• Explain how a plain vanilla interest rate swap can be used to transform an asset or a liability and calculate the resulting cash flows
• Explain the role of financial intermediaries in the swaps market
• Describe the role the confirmation in a swap transaction
• Describe the comparative advantage argument for the existence of interest rate discount rates plain vanilla interest rate swap are computed swaps and evaluate some of the criticisms of this argument
• Calculate the value of a plain vanilla interest rate swap based on two simultaneous bond positions
• Calculate the value of a plain vanilla interest rate swap from a sequence of forward rate agreements (FRA)
• Explain the mechanics of a currency swap and compute its cash flows
• Explain how a currency swap can be used to transform an asset or liability and calculate the resulting cash flows
• Calculate the value of a currency swap based on two simultaneous bond positions
• Calculate the value of a currency swap based on a sequence of FRAs
• Describe the credit risk exposure in a swap position
• Identify and describe other types of swaps, including commodity, volatility and exotic swaps

11) Mechanics of Options Markets

After completion of this topic you will be able to

• Describe the types, position variations, and typical underlying assets of options
• Explain the specification exchange-traded stock option contracts, including that of nonstandard products
• Describe how trading, commissions, margin requirements, and exercise typically work for exchange-traded options

12) Properties of Stock Options

After completion of this topic you will be able to

• Identify the six factors that affect an option's price and describe how these six factors affect the price for both European and American options
• Identify and compute upper and lower bounds for option prices on non-dividend and dividend paying stocks
• Explain put-call parity and apply it to the valuation of European and American stock options
• Explain the early exercise features of American call and put options.

13) Trading Strategies Involving Options

After completion of this topic you will be able to

• Explain the motivation to initiate covered all on a protective pat strategy
• Describe the use and calculate the payoffs of various spread strategies
• Describe the use and explain the payoff functions of combination strategies

14) Exotic Options

After completion of this topic you will be able to

• Define and contrast exotic derivatives and plain vanilla derivatives
• Describe some of the factors that drive the development of exotic products
• Explain how any derivative can be converted into a zero-cost product
• Describe how standard American options can be transformed into nonstandard American options
• Identify and describe the characteristics and pay-off structure of the following exotic options: gap, forward start, compound, chooser. barrier, binary, lookback, shout Asian exchange, rainbow, and basket options
• Describe and contrast volatility and variance swaps
• Explain the basic premise of static option replication and how it can be applied to hedging exotic options

15) Commodity Forwards and Futures

After completion of this topic you will be able to

• Apply commodity concepts such as storage costs, carry markets, lease rate, and convenience yield
• Explain the basic equilibrium formula for pricing commodity forwards
• Describe an arbitrage transaction in commodity forwards, and compute the potential arbitrage profit
• Define the lease rate and explain how it determines the no-arbitrage values for commodity forwards and futures
• Define carry markets, and illustrate the impact of storage costs and convenience yields on commodity forward prices and no-arbitrage bounds
• Compute the forward price of a commodity with storage costs
• Compare the lease rate with the convenience yield
• Identify factors that impact gold, corn, electricity, natural gas, and oil forward prices
• Compute a commodity spread
• Explain how basis risk can occur when hedging commodity price exposure
• Evaluate the differences between a strip hedge and a suck hedge and explain how these differences impact risk management
• Provide examples of cross-hedging, specifically the process of hedging jet fuel with crude oil and using weather derivatives
• Explain how to create a synthetic commodity position, and use it to explain the relationship between the forward price and the expected future spot price.

16) Exchanges, OTC Derivatives, DPCs and SPVs

After completion of this topic you will be able to

• Describe how exchanges can be used to alleviate counterparty risks
• Identify the classes of derivatives securities and explain the risk associated with them
• Identify risks associated with OTC markets and explain how these risks can be mitigated

17) Basic Principles of Central Clearing

After completion of this topic you will be able to

• Provide examples of the mechanics of a central counterparty (CCP)
• Describe advantages and disadvantages of central clearing of OTC derivatives
• Compare margin requirements in centrally cleared and bilateral markets, and explain how margin can mitigate risk
• Compare and contrast bilateral markets to the use of novation and netting
• Assess the impact of central clearing on the broader financial markets

18) Risks Caused by CCP

After completion of this topic you will be able to

• Identify and explain the types of risks faced by CCP's.
• Identify and distinguish between the risks to clearing members as well as non-members.
• Identify and evaluate lessons learned from prior CCP failures.

19) Foreign Exchange Risk

After completion of this topic you will be able to

• Calculate a financial institution's overall foreign exchange exposure
• Explain how a financial institution could alter its net position exposure to reduce foreign exchange risk
• Calculate a financial institution's potential dollar gain or loss exposure to a particular currency
• Identify and describe the different types of foreign exchange trading activities
• Identify the sources of foreign exchange trading gains and losses
• Calculate the potential gain or loss from a foreign currency denominated investment
• Explain balance-sheet hedging with forwards
• Describe how a non-arbitrage assumption in the foreign exchange markets leads the interest rate parity theorem, and use this theorem to calculate forward force exchange rates
• Explain why diversification in multicurrency asset-liability positions could reduce portfolio risk
• Describe the relationship between nominal and real interest rates

20) Corporate Bonds

After completion of this topic you will be able to

• Describe a bond indenture and explain the role of the corporate trustee in a bond indenture
• Explain a bond's maturity date and how it impacts bond retirements
• Describe the main types of interest payment classifications
• Describe zero-coupon bonds and explain the relationship between original discount and reinvestment risk
• Distinguish among the following security types relevant for corporate bonds mortgage bonds, collateral trust bonds, equipment trust certificates, subordinate
• Describe the mechanisms by which corporate bonds can be retired before maturity
• Differentiate between credit default risk and credit spread risk
• Describe event risk and explain what may cause it in corporate bonds
• Define high-yield bonds, and describe types of high-yield bond issuers and some of the payment features unique to high yield bonds
• Define and differentiate between an issuer default rate and a dollar default rate
• Define recovery rates and describe the relationship between recovery rates and seniority

21) Mortgages and Mortgage-Backed Securities

After completion of this topic you will be able to

• Describe the various types of residential mortgage products
• Calculate a fixed rate mortgage payment, and its principal and interest components
• Describe the mortgage prepayment option and the factors that influence prepayments
• Summarize the securitization process of mortgage backed securities (MBS), particularly formation of mortgage pools including specific pools and TBAs
• Calculate weighted average coupon, weighted average maturity, and conditional prepayment rate (CPR) for a mortgage pool
• Describe a dollar roll transaction and how to value a dollar roll
• Explain prepayment modeling and its four components: refinancing, turnover defaults, and curtailments
• Describe the steps in valuing an MBS using Monte Carlo Simulation
• Define Option Adjusted Spread (OAS), and explain its challenges and its uses