Derivative financial instruments: a practical approach

This book aims to facilitate understanding of the mechanisms of derivative financial instruments and the manners in which they can be used, through numerous real-life examples, combining the theoretical approach with the empirical one. This paper presents the many utilities of derivative financial instruments, their trading strategies and their use for creating new products. The presentation provides a critical analysis of the methods of using derivatives, indicating the advantages and disadvantages of appealing to a certain instrument or strategy in a particular situation. The paper also describes the fundamental ideas on determining the market value of derivative financial instruments, as well as the determinants of price in relation to the direction in which they act and to the magnitude of the effect.

Even though a multitude of derivative financial instruments exist, some of them being extremely complex, they are all based on three main categories of contracts: forwards and futures, swaps and options. The paper analyzes each of these categories of contracts in a dedicated chapter, comprising a brief presentation for each type of contract and their specific characteristics, in accordance with the underlying asset. Shares, currencies, interest rates and the credit risk of borrowers, in the case of swap contracts, were considered as underlying assets. The common elements for certain types of contracts were presented using shares as the underlying asset, while only highlighting the particularities in the case of contracts with other underlying assets.

This paper is addressed to students in undergraduate and master programs starting to study derivatives and to those wanting to deepen their studies in this complex field, but also to the treasurers and managers of companies in which the risk management activity can be supported by the use of derivative financial instruments.