BU 232.710.XX - Derivatives –Instructor’s Name - Page 1 of 5/ Derivatives
[NOTE: Each section must have a separate syllabus.]
[DayTime / ex: Monday, 6pm-9pm]
[StartEnd Date / ex: 3/24/15-5/12/15]
[Semester / ex: Fall 2016]
[Location / ex: Washington, DC]
[Phone Number, (###) ###-####]
Required Texts Learning Materials
- Hull J. C., Options, Futures and Other Derivatives, 9th Edition, Prentice Hall.
This is a standard textbook in derivatives and covers a wide range of topics. It is an important book to have in your personal library.
Note: The 7th and the 8th editions of the book also work very well. The 9th edition contains some information about the new regulations for over-the-counter derivatives and a few other very small (for our purposes) modifications.
- Lecture notes will be posted on Blackboard (usually 2 days) before class.
A suggested, non-mandatory, additional reading:
Marthinsen J. (2010), Risk Takers; Uses and Abuses of Financial Derivatives, Pearson Prentice Hall. 2nd edition.
This is a bedside-table, entertaining book which does not contain any formulae. It is a nice reading which helps understanding how, and when, derivatives work.
This course offers a rich overview of forwards, futures, swaps and options. The course will cover both the actual working of derivatives and the analytical tools needed to effectively understand derivatives. Skills are developed in pricing analysis, use of pricing models, trading, and hedging strategies. The strategies are developed to match specific economic goals, such as portfolio risk reduction.
BU.231.620 OR BU.910.611
There has been a dramatic growth in markets for financial derivatives in recent years. In today’s business world, managers can, and sometimes must, use financial derivatives such as futures, options, and swaps to hedge risk. The purpose of this course is to provide students with the necessary skills to value and employ futures, options, and other, related, financial instruments. This course will cover both the actual working of derivatives and the analytical tools needed to effectively understand derivatives. The course balances theory and applications.
It is divided into three main parts.
a)Forwards and Futures
b)Pricing Forwards and Futures
c)Hedging using Forwards and Futures
f)Transforming Assets and Liabilities using Swaps
i)Trading strategies using Options
Part 4 (time permitting):
j)How not to use derivatives: Metallgesellshaft and Barings crises.
Trading derivatives can be dangerous. The collapses of Metallgesellshaft and Barings represent excellent examples of the risks involved in trading derivatives.
k)The role of derivatives in the present economy.
Finance and Social Responsibility:
The effectiveness and perceived integrity of finance have been tested in recent years. Along with preventable excesses and regrettable distortions, financial innovation has, however, always been an effective means for society to achieve its goals, from insurance to consumption to saving. The power of financial innovation as a generator of inclusive prosperity and widespread well-being can (and should be) reclaimed. In this context, optimization of shareholder’s value – for instance – may not be the only metric along which financial success is measured and should be placed, along with other traditional finance metrics, in the broader context of its contribution to society. To this extent, Carey encourages technical, non-ideological, exchanges of ideas leading to a better understanding of the broader role of finance as a force for shared prosperity. The reading (to be announced) provides an initial opportunity for technical discussions of these issues as they relate to the topics covered in “Derivatives”.
All Carey graduates are expected to demonstrate competence on four Learning Goals, operationalized in eight Learning Objectives. These learning goals and objectives are supported by the courses Carey offers. To view the complete list of CareyBusiness School’s general learning goals and objectives, visit the Teaching & Learning@Carey website.
Derivatives are assets whose value depends on the value of other assets. Derivatives are complex instruments and, to fully understand them and employ them succesfully, it is important to take into account multiple factors. This is in line with Carey Learning Goal 1.1.
Quantitative techniques ought to be balanced with qualitative analysis. The course will discuss real business cases in which the sole use of quantitative techniques has, for instance, lead to bankruptcy-type situations. This is in line with Carey Learning Goal 1.2.
Finally, the nature and structure of derivatives may lend itself to fraudulent behavior. The course will briefly analyze instances in which derivatives may lead, and have lead, to unethical behavior. This is in line with Carey Learning Goals 3.1 and 3.2.
By the end of this course, students will be able to:
- Price futures and forwards
- Hedge risk exposure using forwards and futures
- Use swaps for transforming assets and liabilities
- Trade options
- Price options
- Make investment and hedging decisions by combining quantitative and qualitative techniques
Participants are expected to attend all scheduled class sessions. Failure to attend class will result in an inability to achieve the objectives of the course. Full attendance and active participation are required for you to succeed in this course.
AssignmentsAssignment / Learning Objectives / Weight
Homework / 1-6 / 21%
Stocktrak game / 1-6 / 5%
Quizzes / 1-6 / 14%
Final Exam / 1-6 / 60%
Homework (21%): There will be 3 homework assignments, each worth 7%. The assignments have a very important pedagogical role. They are designed to check your understanding of the material covered in class. You can work on these in groups (maximum 3 people) but you do not have to do so, if you so choose.
Stocktrak exercise (5%):For the first time this semester, we are piloting a new trading game called Stocktrak ( Performance on the trading game will be worth 5% of the final grade. Using derivatives (along with stocks and bonds) will be an important aspect of the game. Imformation on the trading game will be provided on the first day of class.
Important: In order not to give any advantage to anyone, the instructor will not provide any consulting advice on (1) the functioning of the Stocktrak website or (2) the actual strategies to implement. You should therefore view Stocktrak as you would view your personal online stock broker (choose your own strategies, place your bets, and contact Stocktrak support system directly for questions related to the website). Once more, no questions related to Stocktrak will be addressed. However, you should always feel free to get in touch with questions about the course’s subject matter.
Quizzes(14%):The quizzes will be short (maximum 15minutes long). They will be closed-book. Each quiz is worth 7% of the final grade. Both quizzes are mandatory and cannot be substituted for a higher weight on the final exam or the assignments.
Final Exam (60%): The (cumulative) final exam will be between 2 and 3 hour long. It will be closed-book.
The grade of Ais reserved for those who demonstrate extraordinarily excellent performance. The grade of A-is awarded only for excellent performance. The grade for good performance in this course is a B+/B. The grades of D+, D, and D- are not awarded at the graduate level.
Please refer to the Carey Business School’s Student Handbook for grade appeal information.
Tentative Course Calendar: (Important: The instructor reserves the right to alter course content or adjust the pace to accommodate class progress)Week / Content / Reading / Goal / HW
1 / Introduction to the Course, Forwards and Futures / Hull, chs 1, 2 5 / 1.1 To introduce students to the world of derivatives.
1.2 To understand the functioning of forwards and futures contracts.
2 / 2.1 Pricing Forwards and Futures
2.2 Forward/Futures Hedging Strategies / 2.1 Hull, ch 5
2.2 Hull, ch 3 / 2.1 To understand the pricing of forward and futures contracts. Students will learn how to use the no-arbitrage condition to price forwards and futures.
2.2 To understand hedging using forward and futures contracts. / Homework 1 posted on Blackboard
3 / Forward/Futures Hedging Strategies / 3.1 Hull, ch 3
3.2 Hull, ch 4 / 3.1 To understand hedging using forward and futures contracts (continued).
3.2 Review of fixed income pricing. / Quiz 1
4 / Interest RateForwards and Futures/Swaps / 4.1 Hull, chs 4 & 6 4.2 Hull, ch 7 / 4.1 Interest rateforwards and futures have a different structure than commodity or equity forwards and futures. Students will learn how interest rate forwards and futures (with an emphasis on Forward Rate Agreements and Eurodollar Futures) work.
4.2 To study swap contracts on interest rates and currencies, why they are useful,and how they can be structured in practise. / Homework 1 due
Homework 2 posted on Blackboard
5 / 5.1 Options and Option Markets
5.2 Option Trading Strategies (**) / 5.1 Hull, chs 10 & 11
5.2 Hull, ch 12 / 5.1 To understand option markets. Students will learn how to compute upper and lower bounds of option prices and the relation between put and call option prices (put-call parity). The no-arbitrage condition will be applied to derive all results.
5.2 What are the most important trading strategies with options? Why are these trading strategies important and what do they really achieve? Now is the time to learn it.
6 / Binomial Trees / Hull, ch 13 / To understand how to price options (and other financial derivatives) using trees. / Homework 2 due
Homework 3 posted on Blackboard
7 / The Black-Scholes-Merton Option Pricing Model and an Introduction to the Greeks (**) / Hull, chs 14, 15 & 19 / The Black-Scholes-Merton pricing model was developed in 1974 but it is still the baseline model for pricing options. We derive it and discuss its pricing implications. / Homework 3 due
8 / Final Exam
Topics with two stars (**) may be covered with on-line material due to limited class time.
Carey Business School
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A Blackboard course site is set up for this course. Each student is expected to check the site throughout the semester as Blackboard will be the primary venue for outside classroom communications between the instructors and the students. Students can access the course site at Support for Blackboard is available at 1-866-669-6138.
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Honor Code/Code of Conduct
All students are expected to view the Carey Business School Honor Code/Code of Conduct tutorial and submit their pledge online.Students who fail to complete and submit the pledge will have a registrar’s hold on their account. Please contact the student services office via email if you have any questions.
Students are not allowed to use any electronic devices during in-class tests. Calculators will be provided if the instructor requires them for test taking. Students must seek permission from the instructor to leave the classroom during an in-class test. Test scripts must not be removed from the classroom during the test.
Other Important Academic Policies and Services
Students are strongly encouraged to consult the Carey Business School’sStudent Handbook and Academic Catalog and Student Resources for information regarding the following items:
- Statement of Diversity and Inclusion
- Student Success Center
- Inclement Weather Policy
Unless explicitly allowed by the instructor, course materials, class discussions, and examinations are created for and expected to be used by class participants only.The recording and rebroadcasting of such material, by any means, is forbidden. Violations are subject to sanctions under the Honor Code.