Objectives

The course is designed to introduce finance students to the analytics of one of the most important tools of contemporary finance, namely financial derivatives. The course focuses on the use and pricing of forwards, futures, swaps, and options, ranging from theoretical to practical aspects.

Over the last 35 years, the markets for financial derivatives have grown considerably, and have generated innovative products, ideas, and job opportunities. Individuals and institutions participate in these markets to meet a variety of objectives. For example, firms and portfolio managers can use derivatives to hedge particular types of risks, or to change the distribution of the returns on their portfolios for speculative purposes. To provide a useful treatment of these topics in a rapidly changing environment, it is necessary to approach topics at a technical level.

Despite the analysis of financial derivatives is conceptually accessible, the materials are initially challenging for some students, since technical concepts build quickly upon each other. Thus, students are strongly advised to make sure they meet course requirements. By the end of the course, students are expected to develop skills for pricing derivatives, and for developing hedging and trading strategies using them. The course also provides the necessary knowledge to undertake related specialized courses.

Contents

• Introduction to Derivatives
• Forward and Future Markets, Hedging Using Futures
• Interest Rates
• Forward and Future Prices
• Interest Rate Futures
• Swaps
• Introduction to Options and Option Markets
• Trading Strategies with Options
• Two-Period Model. Examples: Option Pricing, Forward, Future, and Swap Pricing
• Multiperiod Model: Stochastic Processes in Discrete Time, No Arbitrage, Dynamic Completeness, Valuation, Binomial Trees
• Continuous-Time Model: Stochastic Processes in Continuous Time
• Continuous-Time Model: Black-Scholes Model
• Continuous-Time Model: No Arbitrage Pricing in Black-Scholes model, Greeks

References

Lecture slides and exercises will be posted on the course web site. The suggested book for the course is:

J. Hull, Options, Futures, and Other Derivatives, Prentice Hall, 7th edition, 2008

Alternative books (not required) include:

• J. Hull, Fundamentals of Futures and Options Markets, 6th ed. Prentice-Hall, 2007;
• T. Björk, Arbitrage Theory in Continuous Time, Oxford Finance, 3rd edition, 2009.

Possible additional readings and detailed references will be announced during the course.

Pre-requisites

A good understanding of calculus and probability theory is required.

Evaluation

First attempt

Exam:

Written 1h30 hours

Documentation:

Allowed with restrictions

Calculator:

Allowed with restrictions

Evaluation:

The course has an optional midterm and a mandatory final exam. Exams are closed books and closed notes. A sheet with the formulas that may be necessary for the exams will be provided and published on the course website before the exams. You will need a calculator for the exams. Non-programmable calculators only are authorized.

Your grade will be determined based on the criteria laid out in the syllabus available on the course website and distributed in class.

Retake

Exam:

Written 1h30 hours

Documentation:

Allowed with restrictions

Calculator:

Allowed with restrictions

Evaluation:

Retakes are closed books and closed notes. A sheet with the formulas that may be necessary for the exams will be provided and published on the course website before the exams. You will need a calculator for the exams. Non-programmable calculators only are authorized.

Your grade will be determined on the basis od the retake exam only.