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Textbook on financial derivatives

Front cover of the book Financial Derivatives: Basic Principles of Pricing and Valuation, Forward Contracts, by Matthias Scholz, first edition

Title: Financial Derivatives
Subtitle: Basic Principles of Pricing and Valuation – Forward Contracts –
Author: Matthias Scholz

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Description

This book provides a systematic introduction to the pricing and valuation of:

Forward Contracts

The book is written for first-time readers, especially finance undergraduate students. Explanations focus on the essential concepts, avoiding deep theoretical discussions. Each chapter follows a consistent structure:

Financial terminology is clearly defined.
Pricing and valuation concepts are explained concisely.
Practical examples illustrate the concepts to encourage active learning.

Diagrams and illustrations support the conceptual explanations and help interpret the calculations and data. The writing style is designed to be clear to ensure that concepts can be quickly understood. The book follows a step-by-step approach to make pricing and valuation understandable for readers without prior exposure to financial derivatives.

The primary audience is undergraduate students majoring in finance or financial services. However, the book is also intended for readers who may not have studied financial derivatives during their education and who want to benefit from a structured introduction to the subject. This broader group includes students and professionals from areas such as accounting, education, economics, engineering, general business administration, health sciences, law (including tax law), mathematics and political science. For instance, lawyers or accountants involved in derivatives contract review or regulatory compliance can benefit from an understanding of the financial structure of derivatives.

The book assumes that readers know basic algebra, some finance concepts like present value, future value or compounding and discounting using interest rates. An introductory textbook or course in financial mathematics provides sufficient background to follow the explanations and examples. Where relevant, financial mathematics concepts are briefly refreshed within the chapters.

The book is recommended as preparatory reading before joining a finance undergraduate class. During a course, several concepts will be covered in greater depth using comprehensive textbooks. Later, readers will be able to work on advanced details, alternative pricing approaches, exceptions, and special cases. Footnotes in the text indicate primary sources and recommended textbooks for further reading.

List of Abbreviations and Acronymsxv
List of Symbols and Notationsxix
List of Definitionsxxiii
List of Examplesxxv
List of Figuresxxix
List of Tablesxxxi
Prefacexxxiii
Scopexxxiii
Conventionsxxxiii
Elements of each chapterxxxiv
Model assumptionsxxxvii
Acknowledgementsxxxviii
Feedbackxxxviii
IIntroduction and Overview1
1Introduction3
1.1.Definition and prerequisites of financial derivatives3
1.1.1.Financial (purchase) contracts4
a).Relevant elements4
b).Spot contracts5
1.1.2.Settlement at a future time6
1.2.Derived value9
1.3.Forward contracts overview10
1.3.1.Main principles10
1.3.2.Positions11
2Classification, Underlying Assets, Purposes and Settlement15
2.1.Classification15
2.1.1.Contingent derivatives: options16
2.1.2.Non-contingent derivatives17
a).Forwards18
b).Futures18
c).Swaps18
2.1.3.Other specialized contracts19
2.2.Underlying assets and underlying variables19
2.2.1.Common properties and suitability for financial derivatives20
2.2.2.Financial instruments21
a).Concrete21
b).Abstract22
2.2.3.Commodities22
a).Hard commodities22
b).Soft commodities22
2.2.4.Financial properties of underlying assets22
2.3.Purposes23
2.3.1.Hedging23
2.3.2.Speculation25
2.3.3.Arbitrage25
a).Efficient markets26
b).Contract relationships26
2.4.Settlement27
IINon-Contingent Derivatives31
3Properties33
3.1.Positions34
3.1.1.Long34
3.1.2.Short34
3.1.3.Economic objectives34
3.2.Time parameters35
3.2.1.Initiation35
3.2.2.Maturity36
3.2.3.Term37
3.2.4.Remaining time to maturity37
4Financial Parameters39
4.1.Value39
4.1.1.Value at maturity40
a).Long position40
b).Short position41
4.1.2.Value at any point in time42
a).Long position43
b).Short position45
4.2.Profit45
4.2.1.Long position46
4.2.2.Short position47
4.3.Payoff49
5Determination of the Forward Price51
5.1.Fair forward price51
5.2.Replication of cash flows54
5.2.1.Arbitrage57
a).Arbitrage and forward contracts57
b).Forward price too high58
c).Forward price too low60
d).Efficient market62
5.2.2.Expected future price development62
5.3.Cost-of-carry model62
5.3.1.Holding cost63
5.3.2.Holding benefits65
5.3.3.Cost-of-carry66
a).Cost-of-carry given as a rate67
b).Cost-of-carry given in absolute terms69
c).Cost-of-carry and the time value of money69
d).Forward pricing including net holding cost70
6Interest Compounding73
6.1.Discrete compounding73
6.1.1.Periodic interest rate74
6.1.2.Number of compounding periods74
6.1.3.Equivalent interest rates76
6.2.Continuous compounding78
6.2.1.Differences between discrete and continuous compounding81
6.2.2.Equivalent interest rates using continuous compounding83
6.3.Forward pricing using continuous compounding85
IIIUnderlying Assets and Forward Contracts87
7Equity89
7.1.Discounted cash flow valuation89
7.2.Zero-growth equity valuation model90
7.3.Two-step dividend growth model91
8Equity Forwards95
8.1.Pricing96
8.1.1.Discrete compounding97
a).Without dividends97
b).With dividends97
8.1.2.Continuous compounding99
a).Forward pricing on total return indices99
b).Forward pricing on price indices100
c).Forward pricing and compounding conventions101
8.2.Valuation103
8.2.1.Valuation at maturity103
8.2.2.Valuation before maturity104
a).Valuation without dividends104
b).Valuation with discrete dividends105
c).Valuation with continuous dividends108
9Fixed Income and Bonds111
9.1.Bonds112
9.2.Equity and debt comparison116
9.2.1.Legal and financial properties116
9.2.2.Payment structure and valuation implications117
9.3.Classification of fixed income118
9.4.Valuation of fixed income120
9.5.Zero-coupon bonds121
9.6.Coupon bonds124
9.6.1.Pricing variables125
9.6.2.Pricing127
9.6.3.Premium and discount bonds129
a).Premium bond price trajectory131
b).Discount bond price trajectory133
9.6.4.Pricing after issuance135
9.7.Investment between coupon payment dates137
9.7.1.Pricing137
a).Fractional settlement coupon period138
b).Bond price calculation139
c).Simplification140
9.7.2.Quoted price and accrued interest142
10Fixed-Income Forwards147
10.1.Pricing147
10.2.Valuation149
11Forward Rate Agreements155
11.1.Pricing157
11.2.Valuation161
11.2.1.Valuation at the end of the forward interest period162
11.2.2.Valuation at the beginning of the forward interest period163
12Currencies and Exchange Rates165
12.1.Exchange rates166
12.2.Currency conversion167
12.3.Price currency and base currency168
12.4.Appreciation and depreciation169
12.5.Sell rates and buy rates170
12.6.Cross-rates172
12.7.Triangular currency arbitrage173
13Currency Forwards177
13.1.Pricing177
13.2.Valuation180
13.2.1.Valuation at maturity180
13.2.2.Valuation before maturity182
14Commodities183
14.1.Sectors185
14.1.1.Hard commodities185
14.1.2.Soft commodities185
14.2.Features186
14.3.Spot market investment187
14.3.1.Investor participation187
14.3.2.Market participants and investor intention188
a).Speculation188
b).Hedging188
c).Trading188
d).Arbitrage188
14.4.Comparison to financial assets189
14.5.Spot market valuation189
14.5.1.Supply and demand factors189
14.5.2.Fundamental analysis190
15Commodity Forwards193
15.1.Pricing194
15.1.1.Fair forward price and economic indifference194
15.1.2.Holding costs194
a).Financing costs194
b).Storage costs194
15.1.3.Convenience yield195
a).Contango197
b).Backwardation198
15.2.Valuation200
15.2.1.Valuation at maturity201
15.2.2.Valuation before maturity201
Appendices205
Index210
Reader Feedback Request213
Author215

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Features

Systematic structure

The book is written by one author as one continuous text. A brief and a detailed table of contents show how the book is built. As a rule, a term is defined and explained in the book before it is used in later chapters and examples. Conventions for abbreviations, symbols and notation apply to the whole book.

Easy navigation

The book is built for reference. Lists of abbreviations, symbols and notation show what each stands for. Lists of definitions, examples, figures and tables point to each item by chapter and page. A detailed index leads from a keyword to the topic.

Schematic overviews

Overview diagrams show how a topic divides into categories.

Overview diagram: financial derivatives divide into non-contingent derivatives (forwards, futures, swaps) and contingent derivatives (options); forwards are covered in chapter 3

Annotated formulas

Each formula comes with a table of its notation. Symbols need not be looked up elsewhere.

Formula 7.3 for the value V0 as the sum of discounted dividends in the growth phase and the discounted terminal value in the perpetual phase, followed by a table of its notation

Outlined chapters

Each chapter opens with its table of contents, which lists the sections covered.

Opening of chapter 3, Properties, with its table of contents listing sections 3.1 to 3.2.4 and their page numbers

Clear definitions

Terms are defined and a list of definitions gives an overview.

Definition 3.1, Forward: a forward or forward contract is a financial contract entered at t = 0, in which two parties agree to settle a transaction at a future date T > 0 for a forward price F

Concise explanations

Each definition is followed by an explanation in short sentences. Bullet points and symbols set out the idea point by point.

Section 4.1, Value: Definition 4.1 of value, followed by bullet points and a short explanation of how the value of a forward contract is determined

Simplified examples

Concepts are illustrated with short, simplified examples. Each example poses a question and works out the answer step by step, with a focus on the method. Amounts, rates and dates are chosen to keep each calculation simple.

Example 4.3, Long forward value at initiation: a question with given numbers, followed by the step-by-step calculation of the value V0 and a short conclusion

Visualized abstract concepts

Overview diagrams and annotated timelines show structure and sequence. Annotations name the relevant steps.

Figure 9.3, Settlement dates of fixed-income securities: a timeline with coupon dates C1, C2, Ct and CT, and labeled boxes for settlement on and between coupon payment days

Labeled plots

Plots accompany the mathematical calculations and show the results.

Long forward contract value during the term: a plot of spot and forward prices at t = 0, 1 and 2, with the value V = 105 - 110 = -5 at t = 1 and the discounting of F to t = 1

Consistent design and typography

The book uses the same styles and the same color system in every chapter. Each type of element has its own color.

Plot legend: spot prices as blue points, forward prices as red points and value as a green arrow

Reviews

Selected reviews from Amazon.com, Amazon.ca and Amazon.de:

This book is an excellent and thorough introduction to the world of OTC (Over-The-Counter) Forward Contracts.

Amazon.com, January 2026

The textbook is easy to read with great examples.

Amazon.ca, April 2026

This is an introductory textbook on financial derivatives, well-suited for undergraduate students.

Amazon.ca, November 2025

The book is very well structured, the language is clear and the text does not overwhelm the novice with jargon and notation.

Amazon.de, January 2026

Details

Title: Financial Derivatives
Subtitle: Basic Principles of Pricing and Valuation – Forward Contracts –
Author: Matthias Scholz
Language: English
Published: 13 October 2025
Pages: 253 (including front matter)
Hardcover: ISBN 978-1-0696434-1-4
Paperback: ISBN 978-1-0696434-0-7