Basics of Derivative Pricing and Valuation (2025 Level I CFA® Exam – Derivative – Module 2)

Master the CFA Level I Derivatives basics in one lesson. Professor James Forjan explains arbitrage, replication, and risk neutrality, then walks through pricing and valuing forwards, futures, FRAs, swaps, and options using time value of money and the cost of carry. You will also learn put call parity, put call forward parity, moneyness, and the one period binomial model, plus European vs American options.

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Topic 7 – Derivatives
Module 2 – Basics of Derivative Pricing and Valuation
0:00 Introduction and Learning Outcome Statements
6:38 LOS: Explain how the concepts of arbitrage, replication, and risk neutrality are used in pricing derivatives.
14:29 LOS: Distinguish between value and price of forward and futures contracts.
LOS: Calculate a forward price of an asset with zero, positive, or negative cost of carry.
16:36 LOS: Explain how the value and price of a forward contract are determined at expiration, during the life of the contract, and at initiation.
21:50 LOS: Describe monetary and nonmonetary benefits and costs associated with holding the underlying asset and explain how they affect the value and price of a forward contract.
28:51 LOS: Define a forward rate agreement and describe its uses.
30:55 LOS: Explain why forward and futures prices differ.
33:56 LOS: Explain how swap contracts are similar to but different from a series of forward contracts.
35:15 LOS: Distinguish between the value and price of swaps.
39:00 LOS: Explain the exercise value, time value, and moneyness of an option.
47:25 LOS: Identify the factors that determine the value of an option and explain how each factor affects the value of an option.
48:41 LOS: Explain put–call parity for European options.
56:14 LOS: Explain put–call–forward parity for European options.
57:24 LOS: Explain how the value of an option is determined using a one-period binomial model.
1:06:42 LOS: Explain under which circumstances the values of European and American options differ.
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