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Valuing Derivatives

Posted by Bill Campbell III, CFA on February 11, 2014
Posted in: Free.

Valuing derivatives – forwards, futures, FRAs, and swaps – is much the same as pricing them.  The value of a derivative is the amount that one party would have to pay the other if the derivative were to expire today; it depends on the price of the underlying today compared to the price at the inception of the derivative.  Therefore, valuing a derivative generally means doing the same sort of calculation you did to price the derivative, then comparing today’s price to the original price.  Finally, bear in mind that the value to one party is the negative of the value to the other party.  I encourage you to practice valuation problems always from the same party’s point of view (e.g., always from long’s point of view in valuing a forward contract); if you have to calculate it from the other party’s point of view on the exam, do it the way you’ve practiced, then change the sign.

Here are links to articles on valuing derivatives:

  • Valuing Currency Forwards
    • Valuing a Currency Forward: Whence Came That Formula?
  • Valuing Currency Swaps
  • Valuing Equity Swaps
  • Valuing Forwards and Futures
  • Valuing FRAs
  • Valuing Plain Vanilla Interest Rate Swaps

Also note that the formulae used for valuing derivatives will vary depending on whether the risk-free interest rate is given as an effective rate or a nominal rate; for a refresher on nominal vs. effective interest rates, look here.

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← Valuing Plain Vanilla Interest Rate Swaps
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