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IBBC CAPITAL ACADEMY / 2027

Commitments, contingent rights and payoff signs

Independent IBBC Capital draft content for self-study. Not affiliated with or endorsed by CFA Institute. New lessons await subject-matter review. No CFA designation or official PSM credit is awarded.

Learning goals

  • Explain forward commitments using mechanisms and limitations.
  • Explain options using mechanisms and limitations.
  • Explain profit versus payoff using mechanisms and limitations.

Draft · approximately 25 minutes, excluding further revision.

Forward commitments

A forward obligates both sides to transact at a delivery price; a long forward gains when the final underlying price exceeds that agreed price.

Futures add standardized terms and daily settlement; a swap exchanges streams of payments and can be viewed through multiple forward-like periods.

Options

A call gives its holder a right to buy; a put gives a right to sell at the strike under the exercise rules, while the writer has the corresponding obligation.

Long call payoff is max(S−K,0), while long put payoff is max(K−S,0); short-option payoff is the negative before considering premium.

Profit versus payoff

Option profit subtracts premium and relevant funding cost from payoff; an option can finish in the money yet fail to earn a positive profit.

Credit derivatives transfer defined credit-event exposure; payment depends on contractual triggers and settlement, not every adverse news item about the issuer.

Formula and assumptions

Long call payoff=max(ST−K,0); long put payoff=max(K−ST,0)

Original applied case: Commitments, contingent rights and payoff signs

  1. A call has strike 50, final asset price 56 and initial premium 8; ignore financing.
  2. Payoff=6; long profit=6−8=−2. The writer has opposite payoff and profit before other costs.
  3. In-the-money describes exercise value, not a guarantee of profitable ownership.

Errors to catch

  • Do not assume: Long forwards benefit whenever the underlying price falls.
  • Do not assume: A swap consists only of one share purchase.
  • Do not assume: A call holder is obligated to exercise every time.

Original knowledge check

Answer every question before checking. Review explanations after submitting; retry starts a new attempt.

Sources and coverage status

These original lessons are drafts. Public outlines are used to check scope; the official learning-outcome text and proprietary question banks are not reproduced here. Follow the source for exam-year requirements and updates.