Options, futures and swaps — Study Notes

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Options, futures and swaps

Section 7 of Module 12 (up to 20% of the paper) covers options (payoffs, strategies, valuation factors, put-call parity), futures (margining, cost-of-carry pricing, hedging with commodity, equity index and bond futures on Bursa Malaysia Derivatives) and swaps and interest rate options (caps, floors, collars). Most questions are a short payoff or pricing calculation or a 'which position hedges this' decision.

4 min read4 sections

Checked against SIDC Module 12 Study Outline (Jul–Dec 2026) Topics 13–15; J. C. Hull, Options, Futures, and Other Derivatives; Bodie, Kane and Marcus, Investments. Calculations verified in Python. As at October 2026. Independent prep, not endorsed by SIDC or the SC.

Must-know for the exam

Call payoff max(S − K, 0); put payoff max(K − S, 0); profit = payoff − premium.
Call writer breakeven = strike + premium; a naked call writer's loss is unlimited.
Put-call parity (European): C + K ÷ (1 + r)^T = P + S.
Higher volatility raises both call and put values; higher rates raise calls and lower puts.
Futures are standardised, exchange-traded, cleared and marked to market daily; forwards are OTC and settle at maturity.
A margin call restores the account to the initial margin, not the maintenance margin.
Index futures fair value ≈ spot × [1 + (r − dividend yield) × t].
Hedge ratio for an equity portfolio = beta × portfolio value ÷ value of one futures contract.
Interest rate swap: only the net of fixed and floating is paid; the notional is not exchanged.
Cap limits a borrower's floating rate; cap bought + floor sold = collar.

Traps that cost marks

Confusing payoff (before premium) with profit (after premium).
Leaving out the premium paid.
Using strike − premium, which is a put's breakeven.
Mixing up the call writer's and the put writer's worst cases.
Confusing the holder's right with the writer's obligation.
Thinking volatility hurts option holders. Both calls and puts gain from it.
Assuming rates move calls and puts the same way.
Not discounting the strike: an at-the-money call is worth more than the put when rates are positive.

Option payoffs and strategies

Position	Max gain	Max loss	Breakeven
Long call	Unlimited	Premium	K + premium
Short call	Premium	Unlimited	K + premium
Long put	K − premium	Premium	K − premium
Short put	Premium	K − premium	K − premium

Strategies combine positions: a covered call (own share, write call) earns premium but caps the upside; a protective put sets a floor; a bull call spread (buy low-strike call, sell high-strike call) caps both gain and loss; a long straddle (call + put, same strike) profits from a big move either way and loses between strike ± total premium.

Trap: forgetting the premium, or using a put's breakeven for a call.

Takeaway: payoff first, then subtract what you paid or add what you received.

Option valuation

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