BMA5307: Options and Futures

Semester 2 – Course Syllabus

Instructor: Keshab Shrestha Room:TBA

Email: Tel: 6601-1064

Section: Fridays 6:00 – 9:00PM

Venue:Seminar Room 3-4, MochtarRiadyBuilding, Storey 3

Office Hours: TBA

Description:

This course will cover various types of derivative securities including forward, futures, options, swaps, swaptions and credit derivatives etc. We would cover, in detail, the valuation of these derivative securities using Binomial Lattice (Binomial Tree) approach so that you can fully appreciate the fundamental intuition involved in valuation of derivative securities. This will help you to value existing derivative securities as well as those securities which are yet to appear in the market. Time permitting; we will also cover derivative valuation using simulation method.

The course will also cover various applications of derivative securities in managing various types of risks faced by corporations, non-profit institutions as well as sovereign entities. The discussion will cover the management and hedging of currency risks, interest rate risks, commodityprice risks as well as credit risks including the use of stock index futures in changing CAPM beta and the use of bond futures in changing the duration of liabilities or bond portfolios.

The course is expected to be fairly quantitative. We would be making heavy use of Excel as an important analytical tool including the VBA macros. The materials contained in the textbook will be supplemented by lecture notes.

In this course, we will specifically study the following topics in various levels of depth

Derivatives markets … limited general overview.
Derivatives pricing … in-depth coverage of several important topics.
Derivatives applications … in-depth look at specific applications.

By the end of this course, you should be able to:

Evaluate the various risks associated with the derivatives
Make use of different types of derivatives to manage risks
Value many different derivatives including equity and interest rate derivatives

Pre-requisites: BMA5008 (Financial Management)

Class Format

Classes will be conducted in a mix format that would encompass lectures and case studies. All lecture notes and announcements will be available on IVLE. Since the lectures wouldmake extensive use of Excel, I encourage you to bring your Laptop to the class.

Homework Assignments

Please note that only some of the assignments will be graded. But, all assignments will be discussed in class (selected questions only). Homework assignments are due will be indicated in the assignments themselves. Late submissions will NOT be accepted

Required Textbook

John C. Hull,Options, Futures and Other Derivatives, 8th Edition (2012)(JH).

References

Don Chance, An Introduction to Derivatives and Risk Management, HarcourtCollege Publishers, 5th Edition, 2001.

Robert Jarrow and Stuart Turnbull, Derivative Securities, SouthWesternCollege Publishing, 2nd Edition, 2000.

Frank J. Fabozzi, Bond Markets, Analysis and Strategies, 8th Edition, 2013, Pearson (FF).

Course Assessment

Class Participation:10%

Case Projects:20%

Quizzes (date to be announced):10%

Homework:20%

Open-Book Final Examination:40%

Class Schedule

Topic / Readings
1 / Introduction to Derivatives / JH Ch. 1
2 / Futures:Valuations / JHCh. 5
3 / Interest Rate Futures & Swaps / JH Ch. 6, 7
4 / Introduction to Options / JHCh. 9 & 10
5 / Option Trading Strategies / JHCh. 11
6 / Option Pricing: The Binomial Lattice Model / JHCh. 12
7 / Option Pricing: The Black-Scholes-Merton Model / JHCh. 13, 14
8 / Option on Indices, Currencies and Futures / JHCh. 16, 17
9 / Interest Rate Derivative Pricing: Binomial Lattice Approach / Notess
10 / Valuation of Callable Bonds, Putable Bonds,Swaps, Swaptions, Floors and Caps / Notes
11 / Credit Risk and Credit Derivatives / JHCh. 23,24
12 / Case Presentation