FRM Parr I Book 3: FrnanciaL MarkeETs AND PRODUCTS Financia MARKETS AND Propucts 23: Introduction (Options, Futures, and Other Derivatives) 24: Mechanics of Futures Markers 25: Hedging Strategies Using Furures 26: Interest Rates 27: Determination of Forward and Futures Prices 28: Interest Rate Futures 29: Swaps 30: Properties of Stock Options Trading Strategies Involving Options Interest Rate Caps and Floors 32: Fundamentals of Commodity Spot and Futures Markets 33: Commodity Forwards and Futures 34; Foreign Exchange Risk £35: Corporate Bonds CHALLENGE ProBLems CHALLENGE PropLem ANsweRs GARP FRM Practice Exam Questions GARP FRM Practice Exam ANSWERS Formutas APPENDIX Inpex ‘©2012 Kaplan, Ine 19 30 40 55 o7 80 96 108 124 129 140 159 172 185, 189 193 205 218 221 224 Page |FRM PART I BOOK 3: FINANCIAL MARKETS AND PRODUCTS (©2012 Kaplan, Inc, dba, Kaplan Schweset. ll ight reserved Drinced in che United Seats of America ISBN: 978-1-4277-3888-2 /1-4277-3868-2 PN: 3200-2109 Required Disclaimer: GARP® does noe endorse, promote, review, or warrant the accuracy ofthe products or services offered by Kaplan Schweser of FRM? related information, nor does i endorse any pass rates claimed bythe provider. Further, GARP® is nor responsible for any fas or costs paid by the nace to Kaplan Schwese nor is GARP® responsible for any fes or cost of any perm or entity providing any services to Kaplan Schweser. FRM®, GARP®, and Global Association of Risk Professionals™ are trademarks owned by the Global Associaton of Risk Professionals, Inc. GARP FRM Practice Exam Questions are teprinued with permission. Copyright 2011, Global Assocation of Risk Professionals, Al sights reserved, ‘These materials may not be copied without written permission from the author. The unauthorized duplication of these notes i avoletion of global copyright laws. Your asstance in pursuing pocential violators of this law is greatly appreciated, Disclaimer: The Study Notes should be used in conjunction with che original readings asset forth by GARP®. ‘The information contained in thes Scudy Notes is based on the original readings and is believed to be accurate, However, their accuracy cannot be guaranteed nor ie any wateanty conveyed 2st your ultimate exam success. ©2012 Kaplan, Ine‘The following isa review of the Financial Markets and Products principles designed o adres che AIM sexcentents set forth by GARD®, This topic is also covered in: INTRODUCTION (OpTIONS, FUTURES, AND OrHER DERIVATIVES) Topic 23 Exam Focus In this topic, we presene the basic concepts of derivative securities and derivative markets. For the exam, know he basic derivative terms as well as che cerms related to derivative markets, Also, be able to compute payofis for the different derivative secutities and be able to create a hedge and know how to rake advantage of an arbitrage situation, As indicated by the tile, this topic provides an introduction to the upcoming derivatives material Derivarive Markets AIM 23.1: Differentiate beeween an open outcry system and electronic trading ‘An open outcry system and electronic trading system are different forms of trading securities (marching buyers with sellers), The open outcry system (e.g., CBOT) is the more traditional system, which involves eeaders actually indicating their trades through hand signals and shouting, Electronic trading does not involve an actual “physical” exchange location, but rather involves matching buyers and sellers electronically via computers (eg., NASDAQ. AIM 23.2: Describe the over-the-counter market and how it differs from trading on an exchange, including advantages and disadvantages. An over-the-counter (OTC) market differs from a traditional exchange. It is @ customized trading market which utilizes telephone and computers to make trades. This market typically involves much larger trades than tradicional exchanges. The most typical OTC trade is conducted over the phone. Since terms are not specified by an “exchange,” participants have more flexibility to negotiate the most mutually agreeable or ateractive trade. The OTC market is several times the size of the traditional exchange market. For example, in 2007, the OFC market was over $500 trillion, while the exchange-traded market was under $100 trillion. Advantages of over-the-counter trading: + ‘Terms are nor set by any exchange. * Participants have flexibility co negotice. + In the event of a misunderstanding, calls are recorded. ‘©2012 Kaplan, ine Page 3