2. Equity Derivatives

This chapter explores the fundamental aspects of exchange-traded equity derivatives, including stock options, stock index options, single-stock futures, and stock index futures. It provides a detailed examination of the structure and mechanics of these instruments, offering foundational knowledge essential for understanding their applications. The chapter emphasizes the importance of managing maintenance margins and rolling contracts to ensure consistent exposure to underlying assets and mitigate risks such as forced liquidation. It also delves into the pricing efficiency of equity derivatives markets, highlighting how market forces and technological advancements have minimized inefficiencies. Additionally, the chapter discusses operational challenges like roll yield and basis risk, providing practical considerations for optimizing returns and managing portfolio exposures effectively. By focusing on these foundational elements, this chapter aims to provide operational insights necessary to utilize equity derivatives effectively while mitigating associated risks.