Straight bond. Diversities  in bond contracts. Underlying principles of pricing.  Discounting conventions. Clean and full price. Price-yield relationship. Price-maturity relationship. Yield to maturity. Other yield measures.

Concept of yield curve. Zero yield curve. Bootstrapping. Synthetization. Forward rates. Implied zero forward rates. Synthetic forward rates. Properties of implied forward rates. Pricing of floaters. Inflation-linked bond. Par yield curve.

Investment risks from holding bonds (interest rate risk, credit risk, reinvestment risk, inflation risk,liquidity risk, call risk). Macaulay and modified duration. Properties of duration. Immunisation rule. Limitations of immunisation. Convexity. Credit rating and credit spread. Credit yield curves.   Risk neutral probabilities of default. Historical probabilities of default.

Level-payment mortgage (annuity formula, decomposition of the regular instalment, payment calendar). Prepayments. Traditional mortgage and inflation (tilt effect, affordability problem). Graduated-payment mortgage. Foreign-currency mortgage. Securitization with mortgages (agency deals, private-label deals, sequential and subordination pay structures).

Money market vs. capital market instruments (day/year conventions, annual vs. periodic interest rates). Time deposit (effective and simple return, short-term yield curve, linear interpolation). Certificate of deposit (holding period yield). Treasury bill (discount, bond-equivalent yield). Sale and repurchase agreement (arrangement of repo, legal vs. economic treatment, haircut, funding purchase of bonds, leveraging bond portfolio, major tool of moneatry policy),

Coupon swap. Speculative trades (risk taking and risk transforming strategies). Arbitrage trades (liability and asset arbitrage swap). New-issues arbitrage. Hedging trades. Warehousing coupon swap (warehousing with bonds and interest rate futures). Valuation of coupon swap (swap rates, swap curve). Basis swap. Esoteric interest rate swaps.

Main features of FRA contract. FRA formula. Applications of FRA contracts (speculative and hedging trades). FRA strip (construction, pricing). Price links with coupon swaps. Price links with interest rate futures. Futures-linked FRA. Interpolated FRA.

Exchange rate conventions. Discounts and premiums. Covered interest parity. Outright forward. Forward swap. Currency coupon swap (hedged borrowing, hedged investment, new-issues arbitrage, warehousing). Valuation of currency swaps. Equity swap (fixed and variable notional principal amount). Swaption.

Basic properties and benefits. Credit default swap (description, applications, pricing, analogy with insurance). Total return swap (description, applications, analogy with leasing). Credit options (credit level and credit spread call and put options). Credit forward. Credit link notes (descriptions, examples). Collateralized debt obligations.

Spot contract. Forward contract. Futures contract. Opening of futures contract. Marking to market. Termination of futures contracts. Futures basis and spread. Zero basis at delivery. Mechanics of futures hedge. Value of futures contract. Elimination of counterparty risk.

Broad categories of financial futures. Stock index futures (closing out, cash settlement). Currency futures (closing out, physical delivery). Short-term interest rate futures (closing out, cash settlement, physical delivery). Long-term interest rate futures (closing out, physical delivery, price factor, cost-of-carry transaction, choosing delivery date, cheapest to deliver bond, implied repo rate).

Carry. No-arbitrage conditions. Cost-of-carry formula (borrowing-cash strategy, borrowing-asset strategy). Carry with two futures contracts. Application for currency forwards (covered interest rate parity, uncovered interest rate parity, non-deliverable forward, carry trade). Application for zero-coupon bonds. Fair price of stock-index futures.

Description of speculative trade. Attractiveness of futures contracts. Open position trading. Spread trading (intra-contract spread, inter-contract spread). Butterfly spread.

Description of an arbitrage trade. Bid-ask spread. Box arbitrage (futures analogy of covered interest rate parity). Conversion arbitrage (long and short cost-of-carry arbitrage).

Methods of hedging (price-fixing hedge, offsetting hedge). Synthetic price-fixing hedge. Price-fixing hedge with estimated basis. Price-fixing hedge with notional futures. Elements of offsetting hedge (hedge ratio, hedge efficiency). Minimum variance hedge ratio. Hedging stock portfolio. Hedging interest rate risk. Hedging bond portfolio.

Asymmetric buyer-seller relationship. Call and put options. European and American options. Ice-hockey diagrams. Payoff formulas. Intrinsic and time values. Short-term payoff profiles. Regularities among option premiums. Types of option contracts. Types of financial options. Equity options (a levered firm with limited liability). Stock index options. Currency options (equivalence of call and put, experimental use in monetary policy). Options on futures.

Basic shapes. Classification of option combinations. Straddle. Strangle. Strap and strip. Classification of spreads (vertical, horizontal, diagonal). Vertical bull and bear spreads. Rotated vertical bull and bear spreads (synthetic futures). Spreads of two spreads (butterfly, condor). Horizontal spreads. Covered call. Protective put.

Binomial model (binomial tree, delta-neutral covered call, general formula, example).  Black- Scholes formula on a non-dividend-paying stock (variables, example). Historical and implied volatility. Monte Carlo simulation. Extensions of B-S formula (European put on a non-dividend-paying stock, American call and put on a non-dividend-paying stock, European call on a dividend-paying stock, American put on a dividend-paying stock). Volatility smile. Volatility term structure. Put-call parity (derivation, examples).

Basic measures (sensitivity, elasticity). Option delta (definition, properties). Delta hedging. Dynamic delta hedging. Option gamma (definition, properties). Gamma hedging. Other sensitivities (option theta, option rho, option vega).

Trading advantages of options. Open position trading. Spread trading. Volatility trading. Credit box arbitrage. Debit box arbitrage. Covered call. Fixed-hedge protective put. Dynamic maturity protective put. Dynamic short-term protective put. Delta-neutral protective put.

Conventional versus exotic  options. Classification. Asian option (average price, average strike). Binary options (cash-or-nothing, asset-or-nothing). Breakdown of a call and put into binary options. Package options. Barrier options (knock-in versus knock-out, up versus down). Breakdown of a call and put into barrier options. Compound options. Chooser options. Multi-asset options. Hybrid options.