FIN 3621 Options and Futures
The objective of this course is to provide students with a solid understanding of the pricing and hedging of options and futures contracts. Due to the remarkable growth in the use of financial derivative instruments in risk management and asset management, a clear understanding of derivative markets is essential to all specialists in finance. The course is designed around the central concepts of arbitrage, replication and hedging. While the economic reasoning behind these concepts will be strongly emphasized, some emphasis will also be placed on the practical aspects of the use of derivatives as well as the markets in which they are traded. This course would also prepare students for more advanced courses on derivatives.
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, their participants, their basic functioning and the idiosyncrasies of each
- The structure and specifics of the basic derivative securities, futures, forwards, and options
- The principles behind the pricing of derivative securities, namely no-arbitrage and risk-neutral pricing
- Understand the applicability and limitations of the standard pricing techniques
- Understand relevant risk measures of options
During the acquisition of the above mentioned knowledge the students will acquire the following skills:
- Represent the payoff/profit of a derivative contract both diagrammatically and mathematically
- Construct and evaluate various derivative strategies
- Price derivatives such as options, forwards, and futures using the Black-Scholes model, the binomial model, and no-arbitrage principle
- Conduct hedging using derivative contracts
- Calculate option risk measures (Greeks) and conduct delta hedge
- Implementing Binomial pricing models using Excel VBA
The acquired theoretical and practical knowledge provided by the course should enable the student to understand and apply the basic principle behind the pricing and hedging of derivative instruments such as replication and arbitrage. In addition, the student would acquire the ability to appreciate the financial and economic opportunities that derivative instruments offer while also being able to critically assess their role and practical value in light of how these products are being used in practice
- 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 and implementation in Excel VBA
- Black-Scholes option pricing
- Option Greeks and hedging
Derivative securities are heavily traded internationally. To make students better prepared for the international job market, during this course, examples and cases will be provided to help students extend their scope of thinking from local market to global market. To add more practical values to this course, Excel or R will be used in the lectures and homework assignments so that students can obtain some hands on experience with understanding and using derivative securities in a digital way.
The course will include a combination of lectures and review sessions. The lectures will focus on the exposition of the relevant theories as well as the exposition of the assumptions and limitations of the theories. The review sessions will focus on problem solving by applying the knowledge learned in the lectures.
Deviations in teaching and exams may occur if external conditions or unforeseen events call for this.
This course is based on skills from other courses from the Bachelor of Finance program, such as Financial Markets, Financial Investment Analysis, and Mathematical/Statistical Analysis. Students taking this course as an elective must have equivalent skills.
|Exam category||Weight||Invigilation||Duration||Support materials||Grouping||Comment exam|
Form of assessment:
Examination every semester
|Form of assessment:||Structured test|
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|Resit:||Examination every semester|
Student's own work with learning resources
Group work / Assignments
A course of 1 ECTS credit corresponds to a workload of 26-30 hours. Therefore a course of 7,5 ECTS credit corresponds to a workload of at least 200 hours.