Part 1 Gift
Chapter 1: Basic Concepts of Futures Trading
1. The meaning and types of futures trading 4
1.1 The Significance of Futures Trading 4
1.2 Types of Futures Trading 7
2 Key Specifications of Korea Exchange Futures 9
2.1 Underlying Assets 9
2.2 Price display method 12
2.3 Contract amount 13
2.4 Price Unit and Minimum Price Fluctuation Amount 14
2.5 Payment due on the 15th of each month
2.6 Last trading day 16
2.7 Final Payment 17
3 Profit and Loss of Futures Trading 20
Practice Problem 26

Chapter 2: Understanding the Futures Market
1. The structure of the gift market 30
1.1 Futures Exchange 30
1.2 Settlement Office 31
1.3 Gift Brokerage Company 33
2 Margin System 34
2.1 Deposit 35
2.2 Transaction Margin 37
3 Korea Exchange Futures Trading Procedure 40
3.1 Gift Trading Procedure 40
3.2 Settlement and Final Settlement 42
4 Types of Futures Traders and the Economic Function of the Futures Market 43
4.1 Types of Futures Traders 43
4.2 Economic Functions of the Futures Market 44
Practice Problem 50

Chapter 3: Pricing of Gifts
1. Pricing Futures on Investment Assets 54
1.1 The Holding Cost Model in a Perfect Market 54
1.2 Arbitrage Using Futures 57
2 Pricing of Stock Index Futures 60
2.1 Characteristics and Trading System of Stock Index Futures 60
2.2 Pricing of Stock Index Futures 61
3 Pricing of Interest Rate Futures 65
3.1 Characteristics and Trading System of Interest Rate Futures 65
3.2 Pricing of Interest Rate Futures 65
4 Pricing of Currency Futures 67
4.1 Characteristics and Trading System of Currency Futures 67
4.2 Pricing of Currency Futures 69
5. Pricing of Futures for Consumer Goods 71
5.1 Convenience Value and Gift Price 71
5.2 The Relationship Between Futures Prices and Expected Spot Prices 72
Practice Problem 79
Holding Cost Model in the Boron Imperfect Market 85

Chapter 4 Futures Trading and Risk Management
1 Basic Principles of Hedging 90
1.1 The Meaning of Hedging 90
1.2 basis 92
2 Minimum variance hedge ratio 95
Hedging Using Stock Index Futures 98
3.1 Beta Hedging: Minimum Variance Hedge Ratio 98
3.2 Adjustment for Systematic Risk 99
Hedging Using Interest Rate Futures 102
4.1 Duration 102
4.2 Duration-Based Hedging Strategies 107
Practice Problem 114
Boron 1 Asset Allocation Strategy 121
Boron 2 Net Asset Immunization Strategy 125

Chapter 5 Foreign Exchange Risk Management
1 Foreign Exchange Market 130
2 Exchange Rate Determination Theory 134
2.1 The Law of One Price and Purchasing Power Parity 134
2.2 Interest Rates and Exchange Rates: Interest Rate Parity Theory 138
2.3 The Fisher Effect and the International Fisher Effect 140
3. The Meaning and Measurement of Foreign Exchange Risk 143
3.1 The meaning and types of exposure 144
3.2 Measurement of exposure 144
4 Managing Foreign Exchange Risk 145
4.1 Managing Transaction Exposure 146
4.2 Managing Conversion Exposure 147
4.3 Managing Economic Exposure 148
Practice Problem 157

Chapter 6 Swap Transactions
1 The Significance of Swap Transactions 164
2 Forward Interest Rate Contracts 164
3 Interest Rate Swap 165
3.1 Interest Rate Swap Basics 165
3.2 The Interest Rate Swap Process 167
4 Currency Swap 169
Practice Problem 176



Part II Options
Chapter 7: Basic Concepts of Options
1 The meaning of option 184
Option Value at Expiration Date 187
2.1 Call Option 187
2.2 Put Option 189
2.3 Selling Options 191
3 Korea Exchange Options Market 193
3.1 Key Specifications of Korea Exchange Options 193
3.2 Korea Exchange Options Trading Procedure 198
Practice Problem 205

Chapter 8: Combining Options and Pricing Factors
1 Combination of Options: Put-Call Parity 210
2 Option Price Range and Determinants 215
2.1 Call Option Price Range and Determinants 215
2.2 Put Option Price Range and Determinants 220
2.3 Intrinsic Value and Time Value of Options 222
Practice Problem 227

Chapter 9 Option Investment Strategies
1 Basic Position 236
1.1 Call Option 236
1.2 Put Option 237
2 Hedge Positions 238
2.1 Defense Call 238
2.2 Defensive Put 239
3 spread 240
3.1 Strong spread 240
3.2 Weak spread 242
3.3 Butterfly Spread 242
3.4 Calendar Spread 244
4 Combination 245
4.1 Straddle 245
4.2 Strangle 247
4.3 Strips and Straps 247
5 color 248
Practice Problem 258
Boron Portfolio Insurance 265

Chapter 10 Option Pricing Model
1 Binomial Option Pricing Model 270
1.1 Valuation of Call Options 270
1.2 Valuation of Put Options 277
2 Black-Scholes Option Pricing Model 281
Practice Problem 288
Boron American Options and Early Exercise 294

Chapter 11 Option Value Sensitivity and Hedging
1 Sensitivity of option value 298
1.1 Option Delta 298
1.2 Option Gamma 300
1.3 Option Theta 302
1.4 Option Vega 303
1.5 Option Ro 304
Hedging with Stock Options: Delta Hedging 304
Practice Problem 311

Chapter 12 Combining Futures and Options
1 Combination of futures and options 316
1.1 Synthesis of Options 316
1.2 Synthesis of Gifts 318
2 Gift Option 320
2.1 The Significance of Futures Options 320
2.2 Put-Call Parity 321
3 Swap Section 322
Practice Problem 332

Appendix
Standard Normal Distribution Table 339
Practice Problem Solution 340

Index
Korean Index 363
English index 368

Preface to the Second Edition
Recently, with the advent of the Fourth Industrial Revolution, various issues have been raised that will bring about significant changes to the future financial industry, such as fintech, blockchain, virtual assets, and artificial intelligence (AI).
Furthermore, uncertainty in the domestic and international financial environment is increasing due to the prolonged COVID-19 pandemic, disruptions in global supply chains, and intensifying global political and economic conflicts.
In this situation, the role of finance is emphasized more than ever.
There is an urgent need for sound financial growth, which will contribute to the development of the national economy.
Due to their nature, derivative financial products such as futures and options can generate higher returns even in a bear market compared to spot products such as stocks and bonds, and high returns can be expected with a small investment amount.
However, most derivative financial products have a more complex structure than ordinary stocks or bonds, and if you do not properly understand the risk structure of derivative financial products, you may face irreversible risks.
Based on past experience, it is difficult to deny that the financial crisis related to derivatives was largely driven by speculative incentives seeking high returns in a short period of time, rather than risk management using derivatives.
In this regard, it is necessary to establish an institutional foundation that minimizes the negative effects of derivative financial products and ensures that their positive function of risk management can be effectively implemented.

This book has been written in an easy-to-understand manner so that even beginners can easily understand the core theories of futures and options.
This book consists of 12 chapters, with Chapters 1 through 5 covering futures, Chapter 6 covering swaps, and Chapters 7 through 12 covering options.
In order to reflect recent changes in the financial environment, the following items have been added or supplemented in the second edition.
First, as with the first edition, we focused on understanding basic concepts and principles while excluding complex formulas as much as possible, to the extent that we believed it would be possible to understand the overall content of derivative financial products without difficulty.
We hope that this book will contribute to establishing itself as a guide to sound derivatives investment by providing readers with knowledge about derivatives products in a simple and clear manner.
Second, the revised system faithfully reflects the changes in the derivatives market to enhance the adaptability of the business sector related to derivatives financial products.
This will provide an opportunity for this book to serve as a useful guide not only for students encountering derivative financial products for the first time, but also for practitioners working in the field.
Third, we have added carefully selected examples and practice problems to help you systematically understand the concepts and theories of derivative financial products.
Derivative financial products are a field that must be understood based on the underlying theories and models.
Readers new to derivatives are encouraged to first systematically understand the basic concepts covered in each chapter of this book, then work through examples and practice problems that connect these concepts to their understanding.
Fourth, to facilitate self-directed learning, detailed solutions to the practice problems are provided in the appendix of the book, providing convenience for preparing for various professional qualification exams.
Practice problems come in a variety of formats, including completion/multiple-choice questions and descriptive/calculation questions.
This ensures that this book serves not only as a theoretical book on derivative financial products but also as a practical book.
In this respect, this book will serve as a useful guide for readers preparing for professional certification exams such as the Chartered Financial Analyst (CFA), Certified Public Accountant (CPA), Risk Manager, and Futures Broker, which require knowledge of derivative financial products, to acquire basic knowledge at an entry-level level and further develop applied skills.
Fifth, for readers who have difficulty digesting the complex and difficult content, we have boldly reduced unnecessary content to the extent that we believe it is possible to understand the core content of derivative financial products.
We have tried to make the book lighter, considering the efficiency of learning while preserving the core and essential content that we want to convey through this book.
Through this, we expect to significantly reduce the burden of learning for readers while maintaining the core values ​​that this book seeks to convey.
I would like to express my gratitude to the professors and readers who have adopted this book as a textbook for their encouragement and loving critiques.
Although we have tried to make up for some of the shortcomings of the first edition in this revised edition, we believe there are still many shortcomings.
I hope that through the readers' candid criticism and advice, I can perfectly revise and improve it in the future.
And this book was written by referencing many domestic and foreign literature.
I would like to take this opportunity to ask for the understanding of scholars at home and abroad, and express my deepest gratitude to them.
I would like to express my gratitude to Mr. Lee Gu-man, CEO of Yuwon Books, who actively supported the publication of this book, and to Dr. Moon Pan-su, who provided helpful advice during the writing stage of this book.
Finally, I would like to express my sincere gratitude to my family for sharing my pain and providing me with unsparing encouragement and support while I was writing this book.
July 2022
Written by the author