Derivatives & Options, Decoded

An option exercisable at any time up to and including expiration.

Example: A dividendA payment made from a company's profits to eligible shareholders. may make early exercise of an American call relevant.

American Option is an option exercisable at any time up to and including expiration; the value of the contract changes with the underlying and with contract variables such as time, volatilityThe degree and frequency of price or return fluctuations., interest rates and counterparty credit.

A dividend may make early exercise of an American call relevant.

Before entering American Option, identify what must happen to profit, how much can be lost, when cash may be demanded and whether the contract can be exited fairly.

The obligation imposed on an option seller when the holder exercises.

Example: The call writer is assigned and must deliver the shares.

Assignment is the obligation imposed on an option seller when the holder exercises; the contract can produce exposure larger than the cash paid initially, which makes leverageThe use of borrowed money or derivatives to increase exposure relative to invested capital. and margin central to both return and loss.

The call writer is assigned and must deliver the shares.

Before entering Assignment, identify what must happen to profit, how much can be lost, when cash may be demanded and whether the contract can be exited fairly; option value can fall even when the underlying moves in the expected direction.

An option whose strike price is close to the underlying market price.

Example: A ₦50-strike option is at the money when the share is near ₦50.

At the Money is an option whose strike price is close to the underlying market price; the contract can produce exposure larger than the cash paid initially, which makes leverage and margin central to both return and loss.

For example, a ₦50-strike option is at the money when the share is near ₦50.

Analyse At the Money with a payoff table and stress testAn analysis of portfolio performance under severe but plausible scenarios.; include margin calls, volatility changes, early termination, liquidityThe ease and speed with which an investment can be converted into cash without a major price concession. and counterparty default.

A structured note that redeems early if the underlying meets specified conditions on observation dates.

Example: The note autocalls after the index finishes above its trigger.

Autocallable Note is a structured note that redeems early if the underlying meets specified conditions on observation dates; the value of the contract changes with the underlying and with contract variables such as time, volatility, interest rates and counterparty credit.

The note autocalls after the index finishes above its trigger. The notional or payoff can be much larger than the capital exchanged at inception.

Before entering Autocallable Note, identify what must happen to profit, how much can be lost, when cash may be demanded and whether the contract can be exited fairly.

A futures-curve condition in which longer-dated prices are below the spot priceThe current market price for immediate or near-immediate delivery of an asset. or nearer contracts.

Example: Rolling into cheaper contracts can create positive roll yield.

Backwardation is a futures-curve condition in which longer-dated prices are below the spot price or nearer contracts; draw the payoff at expiry and then consider how market valueThe price at which an asset could trade in the market at a given time. changes before expiry. The two views are related but not identical.

For example, rolling into cheaper contracts can create positive roll yield.

Analyse Backwardation with a payoff table and stress test; include margin calls, volatility changes, early termination, liquidity and counterparty default. Option value can fall even when the underlying moves in the expected direction.

An option activated or extinguished when the underlying crosses a specified level.

Example: A knock-out call ends if the share reaches the barrier.

Barrier Option is an option activated or extinguished when the underlying crosses a specified level; the value of the contract changes with the underlying and with contract variables such as time, volatility, interest rates and counterparty credit.

A knock-out call ends if the share reaches the barrier.

For Barrier Option, record the underlying, notional, strike, premium, expiry, settlement method, collateralAn asset pledged to secure repayment of an obligation., counterparty and payoff in adverse scenarios; a small initial payment can support a much larger economic exposure.

The difference between a spot price and a related futures price, or between two closely related prices.

Example: The cash grain price differs from the futures contract by the local basis.

Basis is the difference between a spot price and a related futures price, or between two closely related prices; the contract creates a payoff linked to an underlying price, rate, index or event. Notional amount, strike, expiry, settlement and collateral determine the exposure.

The cash grain price differs from the futures contract by the local basis.

A correct review of Basis separates hedge objective from speculative exposure and measures the position at portfolioThe complete collection of investments owned by an investor or managed under one mandate. level, not by premium alone; limited contractual loss does not eliminate liquidity or counterparty riskThe risk that the other party to a contract fails to perform..

Buying a higher-strike put and selling a lower-strike put with the same expiration.

Example: The strategy gains from a moderate decline with limited cost.

Bear Put Spread means buying a higher-strike put and selling a lower-strike put with the same expiration. The lower-strike short put reduces cost and caps the payoff once the underlying falls below that strike.

The strategy gains from a moderate decline with limited cost. The notional or payoff can be much larger than the capital exchanged at inception.

Before entering Bear Put Spread, identify what must happen to profit, how much can be lost, when cash may be demanded and whether the contract can be exited fairly.

An option exercisable on specified dates before expiration.

Example: The holder may exercise on each quarterly date.

Bermudan Option is an option exercisable on specified dates before expiration; the contract can produce exposure larger than the cash paid initially, which makes leverage and margin central to both return and loss.

The holder may exercise on each quarterly date.

For Bermudan Option, record the underlying, notional, strike, premium, expiry, settlement method, collateral, counterparty and payoff in adverse scenarios; a small initial payment can support a much larger economic exposure.

Buying a lower-strike call and selling a higher-strike call with the same expiration.

Example: The strategy gains from a moderate rise while capping maximum profit.

Bull Call Spread means buying a lower-strike call and selling a higher-strike call with the same expiration. The short higher-strike call helps finance the long call but caps maximum profit; both maximum loss and maximum gain are known at entry.

The strategy gains from a moderate rise while capping maximum profit.

For Bull Call Spread, record the underlying, notional, strike, premium, expiry, settlement method, collateral, counterparty and payoff in adverse scenarios; option value can fall even when the underlying moves in the expected direction.

A limited-risk option strategy combining three strike levels to benefit from a specific price range.

Example: The trade earns most if the asset finishes near the middle strike.

Butterfly Spread is a limited-risk option strategy combining three strike levels to benefit from a specific price range; the contract can produce exposure larger than the cash paid initially, which makes leverage and margin central to both return and loss.

The trade earns most if the asset finishes near the middle strike. The notional or payoff can be much larger than the capital exchanged at inception.

A correct review of Butterfly Spread separates hedge objective from speculative exposure and measures the position at portfolio level, not by premium alone; option value can fall even when the underlying moves in the expected direction.

A position using options with different expiration dates, usually at the same strike.

Example: The trader sells a near-term option and buys a longer-term option.

Calendar Spread is a position using options with different expiration dates, usually at the same strike; draw the payoff at expiry and then consider how market value changes before expiry. The two views are related but not identical.

The trader sells a near-term option and buys a longer-term option.

A correct review of Calendar Spread separates hedge objective from speculative exposure and measures the position at portfolio level, not by premium alone; a small initial payment can support a much larger economic exposure.

An option giving the holder the right to buy the underlying asset at the strike price.

Example: A call gains value when the share rises well above the strike price.

Call Option is an option giving the holder the right to buy the underlying asset at the strike price; the value of the contract changes with the underlying and with contract variables such as time, volatility, interest rates and counterparty credit.

A call gains value when the share rises well above the strike price.

Analyse Call Option with a payoff table and stress test; include margin calls, volatility changes, early termination, liquidity and counterparty default. Option value can fall even when the underlying moves in the expected direction.

An interest-rate derivative that limits the maximum rate paid by a borrower.

Example: The cap pays when the reference rate rises above 18%.

Cap is an interest-rate derivative that limits the maximum rate paid by a borrower; the value of the contract changes with the underlying and with contract variables such as time, volatility, interest rates and counterparty credit.

The cap pays when the reference rate rises above 18%.

Analyse Cap with a payoff table and stress test; include margin calls, volatility changes, early termination, liquidity and counterparty default. Also compare Forward RateAn interest rate implied today for borrowing or investing during a future period. Agreement, defined here as an agreement settling the difference between a contracted interest rateThe price of borrowing money or the return paid for lending it. and a market reference rate for a future period.

A structured note whose principalThe original amount of money invested or lent, excluding later returns. may be reduced if specified market conditions occur.

Example: The investorA person or organisation that commits capital with the expectation of a financial return. loses part of principal if the underlying index breaches the barrier.

Capital-at-Risk Note is a structured note whose principal may be reduced if specified market conditions occur; draw the payoff at expiry and then consider how market value changes before expiry. The two views are related but not identical.

The investor loses part of principal if the underlying index breaches the barrier.

A correct review of Capital-at-Risk Note separates hedge objective from speculative exposure and measures the position at portfolio level, not by premium alone; limited contractual loss does not eliminate liquidity or counterparty risk.

A contractual promise to repay specified capital, dependent on the guarantor's ability to pay.

Example: The guaranteeA contractual promise by another party to meet an obligation if the primary debtor does not. applies only if the note is held to maturityThe date when a debt investment's principal is scheduled to be repaid..

Capital Guarantee is a contractual promise to repay specified capital, dependent on the guarantor's ability to pay; the value of the contract changes with the underlying and with contract variables such as time, volatility, interest rates and counterparty credit.

The guarantee applies only if the note is held to maturity.

For Capital Guarantee, record the underlying, notional, strike, premium, expiry, settlement method, collateral, counterparty and payoff in adverse scenarios.

Settlement through a cash payment rather than delivery of the underlying asset.

Example: An index future settles in cash because the index itself cannot be delivered.

Cash Settlement describes settlement through a cash payment rather than delivery of the underlying asset; the contract creates a payoff linked to an underlying price, rate, index or event. Notional amount, strike, expiry, settlement and collateral determine the exposure.

For example, an index future settles in cash because the index itself cannot be delivered.

A correct review of Cash Settlement separates hedge objective from speculative exposure and measures the position at portfolio level, not by premium alone; limited contractual loss does not eliminate liquidity or counterparty risk.

A strategy combining a protective put with a written call, often to reduce hedging cost.

Example: The investor limits both downside and upside on the share position.

Collar is a strategy combining a protective put with a written call, often to reduce hedging cost; draw the payoff at expiry and then consider how market value changes before expiry. The two views are related but not identical.

The investor limits both downside and upside on the share position.

Before entering Collar, identify what must happen to profit, how much can be lost, when cash may be demanded and whether the contract can be exited fairly; complex payoff labels should be replaced with a full scenario table.

A swap exchanging payments based on a commodityA standardised physical good such as gold, crude oil, wheat, or cocoa. price.

Example: An airline fixes part of its fuel cost through a commodity swap.

Commodity Swap is a swap exchanging payments based on a commodity price; the value of the contract changes with the underlying and with contract variables such as time, volatility, interest rates and counterparty credit.

An airline fixes part of its fuel cost through a commodity swap.

For Commodity Swap, record the underlying, notional, strike, premium, expiry, settlement method, collateral, counterparty and payoff in adverse scenarios; complex payoff labels should be replaced with a full scenario table.

A futures-curve condition in which longer-dated prices exceed the spot price or nearer contracts.

Example: A commodity fundA fund that gains exposure to commodities or commodity-related securities. loses roll yield while repeatedly buying more expensive futures.

Contango is a futures-curve condition in which longer-dated prices exceed the spot price or nearer contracts; the contract creates a payoff linked to an underlying price, rate, index or event. Notional amount, strike, expiry, settlement and collateral determine the exposure.

A commodity fund loses roll yield while repeatedly buying more expensive futures.

For Contango, record the underlying, notional, strike, premium, expiry, settlement method, collateral, counterparty and payoff in adverse scenarios; option value can fall even when the underlying moves in the expected direction.

The amount of underlying exposure represented by one derivative contract.

Example: One option contract may represent 100 shares.

Contract Size is the amount of underlying exposure represented by one derivative contract; the contract can produce exposure larger than the cash paid initially, which makes leverage and margin central to both return and loss.

One option contract may represent 100 shares.

Analyse Contract Size with a payoff table and stress test; include margin calls, volatility changes, early termination, liquidity and counterparty default. A small initial payment can support a much larger economic exposure.

The tendency of a futures price and spot price to move together as expiration approaches.

Example: ArbitrageSeeking to profit from price differences for the same or closely related assets while limiting directional risk. causes the futures basis to narrow near delivery.

Convergence is the tendency of a futures price and spot price to move together as expiration approaches; the contract creates a payoff linked to an underlying price, rate, index or event. Notional amount, strike, expiry, settlement and collateral determine the exposure.

Arbitrage causes the futures basis to narrow near delivery. The notional or payoff can be much larger than the capital exchanged at inception.

A correct review of Convergence separates hedge objective from speculative exposure and measures the position at portfolio level, not by premium alone; option value can fall even when the underlying moves in the expected direction.

A strategy combining a convertible securityA tradable financial claim or ownership interest, such as a share, bond, or fund unit. with an offsetting short positionExposure that benefits when an asset's price falls. in the issuer's shares.

Example: The trader seeks to profit from mispricing between the bond and equity option.

Convertible Arbitrage is a strategy combining a convertible security with an offsetting short position in the issuer's shares; the contract creates a payoff linked to an underlying price, rate, index or event. Notional amount, strike, expiry, settlement and collateral determine the exposure.

For example, the trader seeks to profit from mispricing between the bond and equity option. The notional or payoff can be much larger than the capital exchanged at inception.

For Convertible Arbitrage, record the underlying, notional, strike, premium, expiry, settlement method, collateral, counterparty and payoff in adverse scenarios.

A strategy that owns the underlying asset and sells call options against it.

Example: An investor holds 1,000 shares and writes calls on those shares.

Covered Call is a strategy that owns the underlying asset and sells call options against it. The written call caps upside above the strike while the premium cushions only a limited amount of downside; the position still carries most of the underlying asset's loss risk.

An investor holds 1,000 shares and writes calls on those shares.

Analyse Covered Call with a payoff table and stress test; include margin calls, volatility changes, early termination, liquidity and counterparty default. Complex payoff labels should be replaced with a full scenario table.

A contract in which one party pays premiums for protection against a defined credit event.

Example: The protection seller pays if the referenced issuer defaults.

Credit Default Swap is a contract in which one party pays premiums for protection against a defined credit event; the contract can produce exposure larger than the cash paid initially, which makes leverage and margin central to both return and loss.

The protection seller pays if the referenced issuer defaults.

For Credit Default Swap, record the underlying, notional, strike, premium, expiry, settlement method, collateral, counterparty and payoff in adverse scenarios; complex payoff labels should be replaced with a full scenario table.

A contractually defined event such as default, bankruptcyA legal process for an entity unable to meet its financial obligations., or restructuringA significant change to a company's debt, operations, ownership, or organisation intended to improve viability. that may trigger credit-protection settlement.

Example: A missed debt payment triggers the CDS process.

Credit Event is a contractually defined event such as default, bankruptcy, or restructuring that may trigger credit-protection settlement; draw the payoff at expiry and then consider how market value changes before expiry. The two views are related but not identical.

A missed debt payment triggers the CDS process.

For Credit Event, record the underlying, notional, strike, premium, expiry, settlement method, collateral, counterparty and payoff in adverse scenarios; limited contractual loss does not eliminate liquidity or counterparty risk.

A currency swap that exchanges cash flows and often principal in two different currencies.

Example: A borrower obtains dollars while paying naira-linked cash flows.

Cross-Currency Swap is a currency swap that exchanges cash flows and often principal in two different currencies; the contract creates a payoff linked to an underlying price, rate, index or event. Notional amount, strike, expiry, settlement and collateral determine the exposure.

A borrower obtains dollars while paying naira-linked cash flows.

A correct review of Cross-Currency Swap separates hedge objective from speculative exposure and measures the position at portfolio level, not by premium alone; a small initial payment can support a much larger economic exposure.

A swap exchanging principal and interest payments in different currencies.

Example: A company swaps naira obligations for dollar obligations.

Currency Swap is a swap exchanging principal and interest payments in different currencies; the contract creates a payoff linked to an underlying price, rate, index or event. Notional amount, strike, expiry, settlement and collateral determine the exposure.

A company swaps naira obligations for dollar obligations. The notional or payoff can be much larger than the capital exchanged at inception.

Analyse Currency Swap with a payoff table and stress test; include margin calls, volatility changes, early termination, liquidity and counterparty default. Option value can fall even when the underlying moves in the expected direction.

The estimated change in an option's price for a small change in the underlying price.

Example: A call with 0.60 delta may rise about ₦0.60 when the share rises ₦1.

Delta is the estimated change in an option's price for a small change in the underlying price. The contract is local rather than fixed. Gamma causes it to change as the underlying moves, especially near the strike and close to expiry.

For example, a call with 0.60 delta may rise about ₦0.60 when the share rises ₦1.

Before entering Delta, identify what must happen to profit, how much can be lost, when cash may be demanded and whether the contract can be exited fairly; complex payoff labels should be replaced with a full scenario table.

Adjusting an underlying position to offset an option portfolio's delta.

Example: The dealer buys shares as call-option delta rises.

Delta Hedging describes adjusting an underlying position to offset an option portfolio's delta; the value of the contract changes with the underlying and with contract variables such as time, volatility, interest rates and counterparty credit.

The dealer buys shares as call-option delta rises.

For Delta Hedging, record the underlying, notional, strike, premium, expiry, settlement method, collateral, counterparty and payoff in adverse scenarios.

A contract whose value depends on an underlying asset, rate, index, or event.

Example: A share option changes value as the underlying share priceThe market price at which one share is quoted or traded. moves.

Derivative is a contract whose value depends on an underlying asset, rate, index, or event; the contract can produce exposure larger than the cash paid initially, which makes leverage and margin central to both return and loss.

A share option changes value as the underlying share price moves.

A correct review of Derivative separates hedge objective from speculative exposure and measures the position at portfolio level, not by premium alone; a small initial payment can support a much larger economic exposure.

Repeatedly adjusting a hedge as market conditions or exposures change.

Example: An option desk rebalances its share hedge throughout the day.

Dynamic Hedging describes repeatedly adjusting a hedge as market conditions or exposures change; the contract creates a payoff linked to an underlying price, rate, index or event. Notional amount, strike, expiry, settlement and collateral determine the exposure.

For example, an option desk rebalances its share hedge throughout the day. The notional or payoff can be much larger than the capital exchanged at inception.

Analyse Dynamic Hedging with a payoff table and stress test; include margin calls, volatility changes, early termination, liquidity and counterparty default. Option value can fall even when the underlying moves in the expected direction.

A swap exchanging payments linked to an equity or equity index for another return stream.

Example: A fund receives stock-index returns and pays a floating rate.

Equity Swap is a swap exchanging payments linked to an equity or equity index for another return stream; the contract creates a payoff linked to an underlying price, rate, index or event. Notional amount, strike, expiry, settlement and collateral determine the exposure.

A fund receives stock-index returns and pays a floating rate. The notional or payoff can be much larger than the capital exchanged at inception.

For Equity Swap, record the underlying, notional, strike, premium, expiry, settlement method, collateral, counterparty and payoff in adverse scenarios; limited contractual loss does not eliminate liquidity or counterparty risk.

An option exercisable only on its expiration date.

Example: The holder cannot exercise the European option early.

European Option is an option exercisable only on its expiration date; the value of the contract changes with the underlying and with contract variables such as time, volatility, interest rates and counterparty credit.

For example, the holder cannot exercise the European option early.

For European Option, record the underlying, notional, strike, premium, expiry, settlement method, collateral, counterparty and payoff in adverse scenarios. Also compare Expiration Date, defined here as the date on which a derivative contract expires or must be settled.

The use of an option holder's contractual right to buy or sell the underlying asset.

Example: The investor exercises a call and buys shares at the strike price.

Exercise is the use of an option holder's contractual right to buy or sell the underlying asset; draw the payoff at expiry and then consider how market value changes before expiry. The two views are related but not identical.

The investor exercises a call and buys shares at the strike price.

For Exercise, record the underlying, notional, strike, premium, expiry, settlement method, collateral, counterparty and payoff in adverse scenarios; option value can fall even when the underlying moves in the expected direction.

The date on which a derivative contract expires or must be settled.

Example: The option loses all remaining time value at expiration.

Expiration Date is the date on which a derivative contract expires or must be settled; the value of the contract changes with the underlying and with contract variables such as time, volatility, interest rates and counterparty credit.

The option loses all remaining time value at expiration.

Before entering Expiration Date, identify what must happen to profit, how much can be lost, when cash may be demanded and whether the contract can be exited fairly; limited contractual loss does not eliminate liquidity or counterparty risk.

An interest-rate derivative that limits the minimum rate received by an investor or lender.

Example: The floor pays when the reference rate falls below 5%.

Floor is an interest-rate derivative that limits the minimum rate received by an investor or lender; the value of the contract changes with the underlying and with contract variables such as time, volatility, interest rates and counterparty credit.

The floor pays when the reference rate falls below 5%. The notional or payoff can be much larger than the capital exchanged at inception.

Before entering Floor, identify what must happen to profit, how much can be lost, when cash may be demanded and whether the contract can be exited fairly; option value can fall even when the underlying moves in the expected direction.

A customised over-the-counter agreement to exchange an asset or currency at a future date and agreed price.

Example: An importer buys dollars forward for payment in three months.

Forward Contract is a customised over-the-counter agreement to exchange an asset or currency at a future date and agreed price; the value of the contract changes with the underlying and with contract variables such as time, volatility, interest rates and counterparty credit.

An importer buys dollars forward for payment in three months.

Analyse Forward Contract with a payoff table and stress test; include margin calls, volatility changes, early termination, liquidity and counterparty default. Limited contractual loss does not eliminate liquidity or counterparty risk.

An agreement settling the difference between a contracted interest rate and a market reference rate for a future period.

Example: A borrower locks a three-month rate beginning six months from now.

Forward Rate Agreement is an agreement settling the difference between a contracted interest rate and a market reference rate for a future period; the contract can produce exposure larger than the cash paid initially, which makes leverage and margin central to both return and loss.

A borrower locks a three-month rate beginning six months from now.

A correct review of Forward Rate Agreement separates hedge objective from speculative exposure and measures the position at portfolio level, not by premium alone.

A standardised exchange-traded agreement to buy or sell an underlying asset at a future date.

Example: A cocoa producer sells futures to lock in a future selling price.

Futures Contract is a standardised exchange-traded agreement to buy or sell an underlying asset at a future date; the contract creates a payoff linked to an underlying price, rate, index or event. Notional amount, strike, expiry, settlement and collateral determine the exposure.

A cocoa producer sells futures to lock in a future selling price. The notional or payoff can be much larger than the capital exchanged at inception.

For Futures Contract, record the underlying, notional, strike, premium, expiry, settlement method, collateral, counterparty and payoff in adverse scenarios; a small initial payment can support a much larger economic exposure.

The set of futures prices for different contract maturities.

Example: The oil futures curve slopes upward during contango.

Futures Curve is the set of futures prices for different contract maturities; draw the payoff at expiry and then consider how market value changes before expiry. The two views are related but not identical.

The oil futures curve slopes upward during contango.

For Futures Curve, record the underlying, notional, strike, premium, expiry, settlement method, collateral, counterparty and payoff in adverse scenarios; option value can fall even when the underlying moves in the expected direction.

The rate at which an option's delta changes as the underlying price changes.

Example: High gamma makes an option's directional exposure change quickly.

Gamma is the rate at which an option's delta changes as the underlying price changes. The contract is highest where delta can change quickly, which is why short-gamma positions may require frequent rebalancingRestoring a portfolio toward its target weights by buying or selling assets. during sharp moves.

High gamma makes an option's directional exposure change quickly. The notional or payoff can be much larger than the capital exchanged at inception.

Before entering Gamma, identify what must happen to profit, how much can be lost, when cash may be demanded and whether the contract can be exited fairly.

Collateral required to open a leveraged derivatives or margin position.

Example: The exchange requires ₦500,000 initial margin for the futures position.

Initial Margin describes collateral required to open a leveraged derivatives or margin position; the contract creates a payoff linked to an underlying price, rate, index or event. Notional amount, strike, expiry, settlement and collateral determine the exposure.

The exchange requires ₦500,000 initial margin for the futures position.

Analyse Initial Margin with a payoff table and stress test; include margin calls, volatility changes, early termination, liquidity and counterparty default. A small initial payment can support a much larger economic exposure.

A swap exchanging fixed-rate and floating-rate interest payments on a notional amount.

Example: A borrower converts floating-rate exposure into fixed payments.

Interest-Rate Swap is a swap exchanging fixed-rate and floating-rate interest payments on a notional amount; draw the payoff at expiry and then consider how market value changes before expiry. The two views are related but not identical.

A borrower converts floating-rate exposure into fixed payments.

A correct review of Interest-Rate Swap separates hedge objective from speculative exposure and measures the position at portfolio level, not by premium alone.

An option with positive intrinsic valueAn estimate of an asset's underlying economic worth based on expected cash flows, assets, or earning power..

Example: A ₦50-strike call is in the money when the share trades at ₦60.

In the Money is an option with positive intrinsic value; the contract can produce exposure larger than the cash paid initially, which makes leverage and margin central to both return and loss.

A ₦50-strike call is in the money when the share trades at ₦60.

Analyse In the Money with a payoff table and stress test; include margin calls, volatility changes, early termination, liquidity and counterparty default.

A four-option strategy designed to profit when the underlying remains within a range.

Example: The trader sells an inner call and put spread and buys outer protection.

Iron Condor is a four-option strategy designed to profit when the underlying remains within a range; draw the payoff at expiry and then consider how market value changes before expiry. The two views are related but not identical.

The trader sells an inner call and put spread and buys outer protection. The notional or payoff can be much larger than the capital exchanged at inception.

For Iron Condor, record the underlying, notional, strike, premium, expiry, settlement method, collateral, counterparty and payoff in adverse scenarios.

A barrier option that comes into existence only after the barrier is reached.

Example: The downside protection changes after the index knocks in.

Knock-In Option is a barrier option that comes into existence only after the barrier is reached; the contract can produce exposure larger than the cash paid initially, which makes leverage and margin central to both return and loss.

The downside protection changes after the index knocks in. The notional or payoff can be much larger than the capital exchanged at inception.

Before entering Knock-In Option, identify what must happen to profit, how much can be lost, when cash may be demanded and whether the contract can be exited fairly.

A barrier option that ceases to exist after the barrier is reached.

Example: The call disappears when the share trades above the upper barrier.

Knock-Out Option is a barrier option that ceases to exist after the barrier is reached; draw the payoff at expiry and then consider how market value changes before expiry. The two views are related but not identical.

The call disappears when the share trades above the upper barrier. The notional or payoff can be much larger than the capital exchanged at inception.

A correct review of Knock-Out Option separates hedge objective from speculative exposure and measures the position at portfolio level, not by premium alone; a small initial payment can support a much larger economic exposure.

Buying a call and a put with the same strike and expiration to benefit from a large move in either direction.

Example: The strategy profits if the share moves far enough after earnings.

Long Straddle means buying a call and a put with the same strike and expiration to benefit from a large move in either direction. The strategy needs a large move in either direction. Its loss is limited to both premiums, and the two breakevens sit above and below the strike by the total premium paid.

The strategy profits if the share moves far enough after earnings.

Before entering Long Straddle, identify what must happen to profit, how much can be lost, when cash may be demanded and whether the contract can be exited fairly; limited contractual loss does not eliminate liquidity or counterparty risk.

Buying an out-of-the-money call and put with the same expiration to benefit from a large move.

Example: The strangle costs less than a similar straddle but requires a larger move.

Long Strangle means buying an out-of-the-money call and put with the same expiration to benefit from a large move. The cheaper out-of-the-money options widen the distance to the breakevens, so the required move is usually larger than for a comparable straddle.

The strangle costs less than a similar straddle but requires a larger move.

Before entering Long Strangle, identify what must happen to profit, how much can be lost, when cash may be demanded and whether the contract can be exited fairly; complex payoff labels should be replaced with a full scenario table.

The minimum collateral balance required to keep a leveraged position open.

Example: A loss pushes the account below maintenance margin.

Maintenance Margin is the minimum collateral balance required to keep a leveraged position open; the value of the contract changes with the underlying and with contract variables such as time, volatility, interest rates and counterparty credit.

A loss pushes the account below maintenance margin.

Before entering Maintenance Margin, identify what must happen to profit, how much can be lost, when cash may be demanded and whether the contract can be exited fairly. Also compare Margin Call, defined here as a demand for additional collateral after an account falls below required levels.

A demand for additional collateral after an account falls below required levels.

Example: The broker issues a margin call after the leveraged position loses value.

Margin Call is a demand for additional collateral after an account falls below required levels; the contract can produce exposure larger than the cash paid initially, which makes leverage and margin central to both return and loss.

For example, the broker issues a margin call after the leveraged position loses value.

For Margin Call, record the underlying, notional, strike, premium, expiry, settlement method, collateral, counterparty and payoff in adverse scenarios; option value can fall even when the underlying moves in the expected direction.

Revaluing a position using current market prices.

Example: Futures gains and losses are marked to market each day.

Mark to Market describes revaluing a position using current market prices; draw the payoff at expiry and then consider how market value changes before expiry. The two views are related but not identical.

For example, futures gains and losses are marked to market each day.

Analyse Mark to Market with a payoff table and stress test; include margin calls, volatility changes, early termination, liquidity and counterparty default. Complex payoff labels should be replaced with a full scenario table.

The reference amount used to calculate derivative payments, which may exceed the cash initially exchanged.

Example: An interest-rate swap has a ₦1 billion notional amount.

Notional Amount is the reference amount used to calculate derivative payments, which may exceed the cash initially exchanged; draw the payoff at expiry and then consider how market value changes before expiry. The two views are related but not identical.

An interest-rate swap has a ₦1 billion notional amount.

Analyse Notional Amount with a payoff table and stress test; include margin calls, volatility changes, early termination, liquidity and counterparty default. Limited contractual loss does not eliminate liquidity or counterparty risk.

The number of outstanding derivative contracts that have not been closed or settled.

Example: Open interest rises when new buyers and sellers create positions.

Open Interest is the number of outstanding derivative contracts that have not been closed or settled; the contract can produce exposure larger than the cash paid initially, which makes leverage and margin central to both return and loss.

Open interest rises when new buyers and sellers create positions. The notional or payoff can be much larger than the capital exchanged at inception.

Before entering Open Interest, identify what must happen to profit, how much can be lost, when cash may be demanded and whether the contract can be exited fairly.

A contract giving the holder a right, but not an obligation, to buy or sell an underlying asset under specified terms.

Example: An investor buys an option to limit the downside on a share position.

Option is a contract giving the holder a right, but not an obligation, to buy or sell an underlying asset under specified terms; the value of the contract changes with the underlying and with contract variables such as time, volatility, interest rates and counterparty credit.

An investor buys an option to limit the downside on a share position.

Before entering Option, identify what must happen to profit, how much can be lost, when cash may be demanded and whether the contract can be exited fairly; limited contractual loss does not eliminate liquidity or counterparty risk.

The price paid by an option buyer to the seller.

Example: The investor pays a ₦3 premium for a call option.

Option Premium is the price paid by an option buyer to the seller; the value of the contract changes with the underlying and with contract variables such as time, volatility, interest rates and counterparty credit.

The investor pays a ₦3 premium for a call option.

A correct review of Option Premium separates hedge objective from speculative exposure and measures the position at portfolio level, not by premium alone; complex payoff labels should be replaced with a full scenario table.

The seller of an option who receives the premium and assumes the exercise obligation.

Example: A put writer may have to buy the underlying at the strike.

Option Writer is the seller of an option who receives the premium and assumes the exercise obligation; the contract creates a payoff linked to an underlying price, rate, index or event. Notional amount, strike, expiry, settlement and collateral determine the exposure.

For example, a put writer may have to buy the underlying at the strike.

Analyse Option Writer with a payoff table and stress test; include margin calls, volatility changes, early termination, liquidity and counterparty default.

An option with no current intrinsic value.

Example: A ₦60-strike call is out of the money when the share trades at ₦50.

Out of the Money is an option with no current intrinsic value; draw the payoff at expiry and then consider how market value changes before expiry. The two views are related but not identical.

A ₦60-strike call is out of the money when the share trades at ₦50. The notional or payoff can be much larger than the capital exchanged at inception.

Analyse Out of the Money with a payoff table and stress test; include margin calls, volatility changes, early termination, liquidity and counterparty default. Option value can fall even when the underlying moves in the expected direction.

The percentage of an underlying asset's gain credited to a structured product.

Example: A 70% participation rate gives a 7% return when the index gains 10%.

Participation Rate is the percentage of an underlying asset's gain credited to a structured product; the contract can produce exposure larger than the cash paid initially, which makes leverage and margin central to both return and loss.

A 70% participation rate gives a 7% return when the index gains 10%.

A correct review of Participation Rate separates hedge objective from speculative exposure and measures the position at portfolio level, not by premium alone; option value can fall even when the underlying moves in the expected direction.

Settlement by delivering the underlying asset.

Example: A physically settled commodity future may require delivery of oil.

Physical Settlement describes settlement by delivering the underlying asset; the contract can produce exposure larger than the cash paid initially, which makes leverage and margin central to both return and loss.

A physically settled commodity future may require delivery of oil.

Analyse Physical Settlement with a payoff table and stress test; include margin calls, volatility changes, early termination, liquidity and counterparty default. A small initial payment can support a much larger economic exposure; Also compare Cash Settlement, defined here as settlement through a cash payment rather than delivery of the underlying asset.

A structured debt instrument designed to return some or all principal at maturity, subject to issuer credit and terms.

Example: The note protects 100% of principal at maturity but caps equity upside.

Principal-Protected Note is a structured debt instrument designed to return some or all principal at maturity, subject to issuer credit and terms; draw the payoff at expiry and then consider how market value changes before expiry. The two views are related but not identical.

The note protects 100% of principal at maturity but caps equity upside.

Analyse Principal-Protected Note with a payoff table and stress test; include margin calls, volatility changes, early termination, liquidity and counterparty default.

A strategy that owns an asset and buys a put to limit downside.

Example: The put establishes a minimum sale price for the shareholding.

Protective Put is a strategy that owns an asset and buys a put to limit downside. The put establishes a floor below the strike for the life of the option, while the premium reduces the position's return if the protection is never used.

The put establishes a minimum sale price for the shareholding.

Analyse Protective Put with a payoff table and stress test; include margin calls, volatility changes, early termination, liquidity and counterparty default.

An option giving the holder the right to sell the underlying asset at the strike price.

Example: A put protects a portfolio against a sharp market decline.

Put Option is an option giving the holder the right to sell the underlying asset at the strike price; the contract creates a payoff linked to an underlying price, rate, index or event. Notional amount, strike, expiry, settlement and collateral determine the exposure.

A put protects a portfolio against a sharp market decline. The notional or payoff can be much larger than the capital exchanged at inception.

Analyse Put Option with a payoff table and stress test; include margin calls, volatility changes, early termination, liquidity and counterparty default. Option value can fall even when the underlying moves in the expected direction.

The sensitivity of an option's value to a change in interest rates.

Example: Long-dated options usually have more rho exposure.

Rho is the sensitivity of an option's value to a change in interest rates. The contract is often smaller than the other Greeks for short-dated options but becomes more relevant as time to expiry and interest-rate sensitivityThe degree to which an investment's price responds to changes in market interest rates. increase.

Long-dated options usually have more rho exposure. The notional or payoff can be much larger than the capital exchanged at inception.

A correct review of Rho separates hedge objective from speculative exposure and measures the position at portfolio level, not by premium alone; option value can fall even when the underlying moves in the expected direction.

The return created when an expiring futures contract is replaced with a later contract at a different price.

Example: Backwardation can produce positive roll yield for a long futures investor.

Roll Yield is the return created when an expiring futures contract is replaced with a later contract at a different price; the contract can produce exposure larger than the cash paid initially, which makes leverage and margin central to both return and loss.

Backwardation can produce positive roll yield for a long futures investor. The notional or payoff can be much larger than the capital exchanged at inception.

For Roll Yield, record the underlying, notional, strike, premium, expiry, settlement method, collateral, counterparty and payoff in adverse scenarios; limited contractual loss does not eliminate liquidity or counterparty risk.

Taking risk primarily to profit from an expected market move.

Example: A trader buys oil futures because they expect prices to rise.

Speculation describes taking risk primarily to profit from an expected market move; the contract can produce exposure larger than the cash paid initially, which makes leverage and margin central to both return and loss.

A trader buys oil futures because they expect prices to rise.

Analyse Speculation with a payoff table and stress test; include margin calls, volatility changes, early termination, liquidity and counterparty default. Option value can fall even when the underlying moves in the expected direction.

The price at which an option holder may buy or sell the underlying asset.

Example: A call with a ₦50 strike allows purchase at ₦50.

Strike Price is the price at which an option holder may buy or sell the underlying asset; the value of the contract changes with the underlying and with contract variables such as time, volatility, interest rates and counterparty credit.

A call with a ₦50 strike allows purchase at ₦50.

A correct review of Strike Price separates hedge objective from speculative exposure and measures the position at portfolio level, not by premium alone.

An investmentAn asset or commitment of money made with the expectation of future income, growth, or both. combining debt and derivatives to create a defined payoff.

Example: A note links return to an equity index while limiting some downside.

Structured Product is an investment combining debt and derivatives to create a defined payoff; the contract creates a payoff linked to an underlying price, rate, index or event. Notional amount, strike, expiry, settlement and collateral determine the exposure.

A note links return to an equity index while limiting some downside.

A correct review of Structured Product separates hedge objective from speculative exposure and measures the position at portfolio level, not by premium alone; limited contractual loss does not eliminate liquidity or counterparty risk.

A contract to exchange cash flows according to agreed rules.

Example: Two parties exchange fixed and floating interest payments.

Swap is a contract to exchange cash flows according to agreed rules; the value of the contract changes with the underlying and with contract variables such as time, volatility, interest rates and counterparty credit.

Two parties exchange fixed and floating interest payments.

A correct review of Swap separates hedge objective from speculative exposure and measures the position at portfolio level, not by premium alone; a small initial payment can support a much larger economic exposure.

The difference between a swap rate and a government-bond yield of similar maturity.

Example: The five-year swap rate trades above the five-year government yield.

Swap Spread is the difference between a swap rate and a government-bond yield of similar maturity; the contract creates a payoff linked to an underlying price, rate, index or event. Notional amount, strike, expiry, settlement and collateral determine the exposure.

The five-year swap rate trades above the five-year government yield.

For Swap Spread, record the underlying, notional, strike, premium, expiry, settlement method, collateral, counterparty and payoff in adverse scenarios; a small initial payment can support a much larger economic exposure.

An option granting the right to enter an interest-rate swap.

Example: A company buys a payer swaption before a planned bond issue.

Swaption is an option granting the right to enter an interest-rate swap; the value of the contract changes with the underlying and with contract variables such as time, volatility, interest rates and counterparty credit.

For example, a company buys a payer swaption before a planned bond issue.

Before entering Swaption, identify what must happen to profit, how much can be lost, when cash may be demanded and whether the contract can be exited fairly; option value can fall even when the underlying moves in the expected direction.

The estimated loss in an option's value from the passage of time, all else equal.

Example: A short-dated option may lose value rapidly through theta decay.

Theta is the estimated loss in an option's value from the passage of time, all else equal. The contract usually works against option buyers and for option sellers, but it is not earned smoothly when volatility and the underlying price are changing.

A short-dated option may lose value rapidly through theta decay. The notional or payoff can be much larger than the capital exchanged at inception.

A correct review of Theta separates hedge objective from speculative exposure and measures the position at portfolio level, not by premium alone; option value can fall even when the underlying moves in the expected direction.

The part of an option premium exceeding intrinsic value, reflecting time and uncertainty before expiration.

Example: A call worth ₦13 with ₦10 intrinsic value has ₦3 time value.

Time Value is the part of an option premium exceeding intrinsic value, reflecting time and uncertainty before expiration; the contract can produce exposure larger than the cash paid initially, which makes leverage and margin central to both return and loss.

For example, a call worth ₦13 with ₦10 intrinsic value has ₦3 time value.

For Time Value, record the underlying, notional, strike, premium, expiry, settlement method, collateral, counterparty and payoff in adverse scenarios.

A swap transferring an asset's total economic return, including income and price changes, without transferring legal ownership.

Example: A bank pays the return on a bond portfolio to a hedge fundA privately offered pooled fund that may use leverage, short selling, derivatives, and flexible strategies..

Total ReturnThe complete investment result from price changes plus income, assuming distributions are included. Swap is a swap transferring an asset's total economic return, including income and price changes, without transferring legal ownership; the contract creates a payoff linked to an underlying price, rate, index or event. Notional amount, strike, expiry, settlement and collateral determine the exposure.

A bank pays the return on a bond portfolio to a hedge fund. The notional or payoff can be much larger than the capital exchanged at inception.

For Total Return Swap, draw the payoff at expiry and then consider how market value changes before expiry; the two views are related but not identical. Option value can fall even when the underlying moves in the expected direction.

A correct review of Total Return Swap separates hedge objective from speculative exposure and measures the position at portfolio level, not by premium alone; complex payoff labels should be replaced with a full scenario table.

The asset, rate, index, or reference on which a derivative's value is based.

Example: Crude oilUnrefined petroleum traded in physical and derivatives markets. is the underlying asset for an oil futures contract.

Underlying Asset is the asset, rate, index, or reference on which a derivative's value is based; draw the payoff at expiry and then consider how market value changes before expiry. The two views are related but not identical.

Crude oil is the underlying asset for an oil futures contract.

Before entering Underlying Asset, identify what must happen to profit, how much can be lost, when cash may be demanded and whether the contract can be exited fairly.

Daily or periodic cash transferred to reflect changes in a derivative position's market value.

Example: The losing futures trader pays variation margin after settlement.

Variation Margin describes daily or periodic cash transferred to reflect changes in a derivative position's market value; the value of the contract changes with the underlying and with contract variables such as time, volatility, interest rates and counterparty credit.

The losing futures trader pays variation margin after settlement.

A correct review of Variation Margin separates hedge objective from speculative exposure and measures the position at portfolio level, not by premium alone.

The sensitivity of an option's price to a change in implied volatilityThe future volatility level implied by an option's market price..

Example: A long option generally gains when implied volatility rises.

Vega is the sensitivity of an option's price to a change in implied volatility. The contract is quoted for a change in implied volatility, not for realised volatility itself. The position can lose from falling implied volatility even after a large historical move.

A long option generally gains when implied volatility rises.

Analyse Vega with a payoff table and stress test; include margin calls, volatility changes, early termination, liquidity and counterparty default. Complex payoff labels should be replaced with a full scenario table.

An option spread using the same expiration but different strike prices.

Example: A bull call spread is a vertical spread.

Vertical Spread is an option spread using the same expiration but different strike prices; the value of the contract changes with the underlying and with contract variables such as time, volatility, interest rates and counterparty credit.

For example, a bull call spread is a vertical spread. The notional or payoff can be much larger than the capital exchanged at inception.

Analyse Vertical Spread with a payoff table and stress test; include margin calls, volatility changes, early termination, liquidity and counterparty default. Option value can fall even when the underlying moves in the expected direction.

An asymmetrical pattern of implied volatility across strike prices.

Example: Equity put options often carry higher implied volatility than comparable calls.

Volatility Skew is an asymmetrical pattern of implied volatility across strike prices; the contract creates a payoff linked to an underlying price, rate, index or event. Notional amount, strike, expiry, settlement and collateral determine the exposure.

For example, equity put options often carry higher implied volatility than comparable calls. The notional or payoff can be much larger than the capital exchanged at inception.

Before entering Volatility Skew, identify what must happen to profit, how much can be lost, when cash may be demanded and whether the contract can be exited fairly.

A pattern in which implied volatility differs across option strike prices.

Example: Deep in- and out-of-the-money options trade at higher implied volatility than at-the-money options.

Volatility Smile is a pattern in which implied volatility differs across option strike prices; the contract can produce exposure larger than the cash paid initially, which makes leverage and margin central to both return and loss.

Deep in- and out-of-the-money options trade at higher implied volatility than at-the-money options. The notional or payoff can be much larger than the capital exchanged at inception.

A correct review of Volatility Smile separates hedge objective from speculative exposure and measures the position at portfolio level, not by premium alone.

A long-dated right, often issued by a company, to buy its shares at a specified price.

Example: The warrant allows purchase of one share at ₦25 before expiration.

Warrant is a long-dated right, often issued by a company, to buy its shares at a specified price; draw the payoff at expiry and then consider how market value changes before expiry. The two views are related but not identical.

The warrant allows purchase of one share at ₦25 before expiration.

Before entering Warrant, identify what must happen to profit, how much can be lost, when cash may be demanded and whether the contract can be exited fairly; a small initial payment can support a much larger economic exposure.