Derivative instruments are the primary tools for portfolio management (i.e. financial risk management), enabling investors to alter the composition of their portfolios by adjusting the exposure to specific securities without actually trading those (underlying) securities. Investors can also manage their wealth by setting specific (hedging) or protecting minimum (insuring) portfolio values through the trading of derivatives based on indices (baskets of representative securities that correlate with individual portfolios).

Universities in South Africa, in general, do not offer introductory courses in derivatives and students battle with this subject at third-year and honours level as they have little prior knowledge about this specialised topic. Introduction to financial derivatives is a concise introduction to the fundamentals and applications of financial derivatives.

Introduction to financial derivatives provides a framework and reference guide that lays the foundation for more advanced studies and titles. The basics of the derivatives market and its four main classes - forwards, futures, options and swaps - are discussed, with the generic principles and applications of each being covered in relative detail but in a simplified format (omitting all derivation of formulae and underlying assumptions). Related concepts and terminology, often confusing to first-time users, are explained.

Introduction to financial derivatives is primarily aimed at second-year students and short-course providers, but undergraduate and graduate students that specialise in related disciplines (e.g. accounting or MBA) should also find it useful.

Johan de Beer is a CFA charterholder and senior lecturer in Financial Risk Management at the University of Pretoria. He is a co-author of a book on Investment Management (Johan Marx – editor). His area of research includes derivatives and the banking system, and his field of interest extends to fixed-income securities and technical analysis.