Derivative Securities Simulation

This simulation challenges participants to use futures, options, and swaps to hedge portfolio risk, speculate on market movements, and implement sophisticated trading strategies, transforming theoretical pricing models into actionable financial intuition.

Derivative Securities Simulation Overview

The Derivative Securities Simulation plunges participants into the high-stakes arena of derivative markets. Acting as traders or portfolio managers for a fund, teams are exposed to volatile market conditions, fluctuating interest rates, and corporate events. They must master the leverage and flexibility of derivatives to protect assets, enhance returns, and manage downside risk.

Unlike static case studies, this simulation provides a live market feed, compelling teams to react to news, volatility shifts, and margin calls in real-time. It bridges the gap between Black-Scholes formulas and the tangible pressure of managing a derivatives book, making it an indispensable tool for advanced finance and risk management courses. Navigate the complex world of derivatives in a dynamic, risk-free environment.

Although ideal for undergraduate and graduate finance courses, executive training, and corporate finance skill workshops, the simulation is modular and scalable, allowing instructors to vary complexity.

Derivative Securities Simulation Concepts

Participants work through realistic scenarios, which can be customized to emphasize or exclude specific topics depending on the learning goals. This modular structure allows the simulation to be tailored to any type of session. Key concepts include:

Pricing and Valuation of Futures, Options, and Swaps
Delta, Gamma, Vega, and Theta for Risk Management
Hedging Strategies: Delta-Hedging, Portfolio Insurance
Speculative Strategies: Straddles, Strangles, Spreads
Interest Rate and Currency Swaps for Liability Management
Put-Call Parity and Arbitrage Opportunities
Margin Requirements and Counterparty Risk
Volatility Smiles and Market Sentiment

Gameflow

What Participants Do

In the simulation, participants will:

Execute trades in options, futures, and swaps on various underlying assets.
Construct and manage a delta-neutral portfolio to hedge against market moves.
Implement option strategies to capitalize on views on volatility, direction, and time decay.
Structure interest rate swaps to transform the profile of corporate liabilities.
Respond to real-time market shocks, earnings announcements, and central bank decisions.
Monitor and meet margin requirements to avoid liquidation.
Analyze profit/loss drivers and risk exposure through dynamic dashboards.
Present a final strategy report justifying their risk-return positioning.

Learning Objectives

By the end of the simulation, participants will be able to:

Apply theoretical pricing models to live, noisy market data.
Design effective hedging strategies to mitigate specific financial risks.
Evaluate the risk-return profile of complex derivative positions using the Greeks.
Synthesize market information to form actionable views and trade accordingly.
Manage the operational and financial risks (leverage, margin) inherent in derivative trading.
Articulate the economic rationale behind trading and hedging decisions.

How the Derivative Securities Simulation Works

This simulation can be run individually or in teams in academic or corporate contexts. Each cycle represents a stage of getting through a pressing financial situation.

1. Team Formation Participants are divided into competing trading desks or fund teams.

2. Market Introduction Teams receive initial capital, a mandate, and access to the trading platform.

3. Live Trading Rounds The simulation progresses through multiple periods. Each round features new market data, volatility updates, and potential "news events".

4. Strategy Execution Teams analyze data, price derivatives, place orders, and manage their existing book of positions.

5. Performance Feedback After each round, teams see their P&L, risk metrics, and ranking on a leaderboard.

6. Final Review The simulation culminates in a debrief where teams explain their strategy, results, and lessons learned from their trades and risk management choices.

Frequently Asked Questions

Is this simulation suitable for undergraduate students? Absolutely. It is highly effective for final-year undergraduates in finance, economics, or business, providing crucial practical context for their theoretical studies.
What is the typical duration of the simulation? The core experience can be run intensively over 1-2 days or extended across 4-6 weekly sessions within a semester-long course, depending on the depth of integration.
Can the simulation be customized for an executive education audience? Yes. For executives, we can focus on corporate finance applications, such as using derivatives for treasury risk management (hedging FX or commodity exposure) and structuring swaps for corporate financing.
What kind of market data and assets are included? The platform simulates diverse assets including equity indices, major currency pairs, commodities (oil, gold), and interest rate products, with data reflecting realistic volatility and correlations.
How are teams assessed within the simulation? Assessment is multi-faceted, based on risk-adjusted returns, consistency in applying hedging strategies, quality of trade rationale, and final portfolio analysis.
Do you provide instructor support and teaching materials? Yes. We provide a comprehensive instructor manual, slide decks for briefing and debriefing, technical guides, and dedicated setup support to ensure a seamless educational experience.
Is this simulation related to your Hedge Fund Simulation? While complementary, they are distinct. The Hedge Fund Simulation focuses on overall portfolio management and asset allocation. The Derivative Securities Simulation drills deep into the specific tools (options, futures, swaps) used within such a fund for hedging, speculation, and alpha generation.

Assessment

Assessment of participant performance can be tailored according to the host institution’s objectives (business school, corporate training, assessment centre). Typical assessment criteria include:

Risk-adjusted returns, accuracy of derivative pricing, effectiveness of hedges (reduction in portfolio volatility/drawdown).
Quality of trade justifications, consistency with stated market views, and adaptation to new information.
Proactive management of the Greeks, adherence to margin rules, and overall book risk control.
Clarity and insight in the concluding report, demonstrating mastery of the link between theory, strategy, and outcome.