Cash and linear derivatives from Topic 1 assumed frictionless funding and perfect data. This topic adds the three layers that make desk prices real: optionality (convex payoffs and the one-period binomial), funding (variation margin, repo, collateral, shorts), and frictions (liquidity and limits to arbitrage, plus the instrument-data conventions that prevent false signals). Together they connect traded instruments to later pricing and risk modules without duplicating the full options-pricing programme.
By the end of this note you should be able to:
- price a one-period option by replication and assemble basic spreads;
- trace futures VM, repo haircuts and short-sale cash flows;
- explain why basis and CIP gaps can persist under capital constraints;
- run a pre-trade conventions checklist (day-count, clean/dirty, identifiers, corporate actions).
In this lesson
- Contents
- The big picture
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