What you will learn
- Assignment and exercise
- Liquidity
- Scenario analysis
- Exposure aggregation
Assignment and exercise
Separate price risk, volatility risk and liquidity risk when assessing derivatives. A position can appear protected under one dimension while remaining exposed to another. Scenario tables should vary more than the underlying price alone.
Liquidity
Margin and collateral rules can change under stress. A portfolio with limited expiry payoff loss can still require interim funding or face unfavorable liquidation. Operational affordability is not identical to the final payoff diagram.
Scenario analysis
Leverage and concentration can amplify a small market move relative to available capital. Aggregate related contracts and offsets cautiously, using the actual legal and account treatment. A theoretical hedge may not receive full margin recognition.
Exposure aggregation
A hedge objective should be explicit: which exposure, horizon and adverse event is being reduced? A hedge that changes unrelated risks or costs needs to be evaluated against the combined portfolio, not celebrated because one leg gained.
Worked example
A protective structure limits one expiry scenario but has a wide bid-ask spread and a near-term funding requirement. Its payoff diagram alone cannot show whether the learner can maintain or exit it affordably.
Try it yourself
List the information required beyond an expiry payoff chart before evaluating that structure's feasibility.
Show the worked solution
Include current valuation, spread and available size, exercise and settlement terms, interim margin, funding capacity, fees and the intended exit horizon. These determine implementation risks absent from a terminal payoff picture.
Apply this to your course project
Model a futures roll and option payoff under stressed scenarios.
Keep the calculation inputs, assumptions and decisions with your work. Practical exercises are self-reviewed; the scored knowledge checks assess the questions shown, not an independent certification of practical competence.