Is Derivative Trading Profitable?
Education / Trading and Investing / Math
Derivatives are financial instruments which typically express a leveraged view on an underlying security or trade idea.
Therefore, unless purely used for hedging purposes, derivatives trading can be highly profitable if the investment thesis works out. However, given their leveraged nature, derivatives also embed higher risk for the potential higher return. In summary, trading derivatives can be a good and cost-effective way to hedge existing portfolio risk/exposure, or express a trade idea.
Derivatives can be traded in listed or OTC format whereby both are often cleared in order to mitigate counterparty default risk.
Since derivatives are often non-linear instruments, exposure may change quickly, which makes diligent risk management and scenario analysis even more important.
The purpose of this book is to provide the theoretical minimum for trading derivatives in various asset and product classes from the perspective of a trader or risk manager. While a trader does not require the same level of technical knowledge as a quant. Moreover, it is essential to understand model risk and behavior when pricing and risk managing derivatives.
The same is true when applying hedging techniques, which are often not perfect and may themselves introduce additional risk. Finally, given the stringent monitoring of capital requirements, the understanding of valuation adjustments, and their impact on the pricing and the derivatives lifecycle is a topic that is impossible to ignore.
Mika Kastenholz is a Managing Director and Head of Structured Macro at Credit Suisse.
Mika’s broad range of knowledge and experience covers trading (complex) derivatives in several asset classes. Systematic investing, and the ever-evolving tech landscape in finance. This book is based on a series of lectures Mika held at the Swiss Federal Institute of Technology in Zurich (ETHZ). And aims to serve as a bridge between industrial practice and academia.
Is Derivative Trading Profitable?
Education / Trading and Investing / Math
