APPLIES TO ACADEMIC YEAR 2014/2015

FIN 3621 Options and Futures

Responsible for the course
Chunyu Yang

Department
Department of Financial Economics

Term
According to study plan

ECTS Credits
7,5

Language of instruction
English

Introduction
Due to the remarkable growth in the use of financial derivative instruments a basic understanding of derivative markets is essential not only to students and specialists in finance, but also to general business practitioners. The objective of this course is to familiarize students with the pricing and hedging of options, futures and if time permits of swaps and other structured products. The course is designed around the central concepts of arbitrage, replication and hedging. While the economic reasoning behind these concepts will be strongly emphasized several technical applications will be considered in order to fully appreciate the underlying principles. Ideally this course should provide a strong basic understanding of derivative securities and prepare for more advanced technical courses on derivatives. Some emphasis will also be placed on the practical aspects of the use of these derivatives as well as the markets in which they are traded.

Learning outcome
Acquired knowledge
The students will acquire a good understanding of the derivatives markets and the derivatives securities available for trading. More specifically the students will develop their understanding with respect to the following topics:

• The derivatives markets which are the regulated exchanges and the over-the-counter markets, their participants, their basic functioning and the idiosyncrasies of each.
• The structure and specifics of the basic derivative securities, futures, forwards, options and swaps.
• The principles behind the pricing of each of the derivative securities, namely no-arbitrage when replication is possible and the bounds and relationships that the no-arbitrage assumption imposes.
• Understand the applicability and limitations of the standard pricing techniques.
• The economic role of the derivative securities and the way they are being used in practice.
• The opportunities that derivative instruments provide and the dangers they hide.

• Represent the payoff of a derivative product both diagrammatically and mathematically.
• Alter the exposure to an underlying asset using derivative securities and plot the final exposure.
• Construct and evaluate various strategies using derivatives.
• Price forwards and futures using the cost of carry model.
• Price options and other derivative securities using the one-period and multi-period binomial model.
• Price options using the Black-Scholes option pricing model.
• Hedge forwards and futures.
• Hedge options using the binomial model or the Black-Scholes model.

Prerequisites
This course is based on skills from other courses from the Bachelor of Finance program, such as Financial Markets, Corporate Finance, Financial Investment Analysis and Mathematical Analysis. Students taking this course as an elective must have equivalent skills.

Compulsory reading
Books:
McDonald, Robert L. 2014. Derivatives markets. 3rd ed., New international ed. Pearson Education. Latest edition is used in class.

Recommended reading
Books:
Hull, John C. 2014. Fundamentals of futures and options markets. 8th ed. Pearson

Course outline

• Introduction to derivatives markets and derivative instruments
• Basic strategies, insurance, hedging and speculation using options and futures
• Financial forwards and futures: pricing and hedging
• Commodity forwards and futures: pricing and cross-hedging
• Parity and other option price relations
• Binomial option pricing
• Black-Scholes option pricing
• Option Greeks and hedging
• Interest rate forwards and futures (if time allows)