30150 - INTRODUCTION TO OPTIONS AND FUTURES
Course taught in English
Synchronous Blended: Lessons in synchronous mode in the classroom (for a maximum of one hour per credit in remote mode)
This is a challenging course: a passion for finance, or a prior acquaintance with the world of investment, can help but is neither a necessary nor a sufficient ingredient to benefit from it. A solid understanding of financial economics, on the other hand, will go a long way. I assume that you are familiar with the mathematics of interest rates (discounting/compounding, equivalence of rates at different maturities), with basic statistics (expected values, standard deviation and variance, ordinary least squares), and calculus (limits, differentials, differentiation, Taylor expansions, partial differentiation, optimization, basic integration). Some concepts can be refreshed in class, but it is your responsibility to ensure that you are comfortable with these background notions.
Derivatives are a key class of financial instruments, crucial to the functioning of companies and financial intermediaries, and at the center of regulatory debate. Nearly half of publicly traded industrial corporations make use of financial derivatives for risk management; and these securities are widely employed among financial firms such as investment banks and asset managers. Among the public, there is also the perception of a "dark side" of derivatives, for example in relation to the role they played in the development of the 2007-2008 financial crisis. The purpose of this course is to make you familiar with the main kinds of derivatives, with an emphasis on pricing and hedging issues, and on how investors and corporations can use these instruments in practice.
The main contents of the course are:
- Introduction to financial derivatives.
- Forwards, futures, and swaps: Institutional aspects, pricing, and hedging.
- Options: Institutional aspects, pricing, and hedging.
- Basics of credit risk and credit derivatives.
I reserve the right to make adjustments to this plan to best serve the interests of the class.
- Describe the institutional features of the main financial derivatives: forwards/futures, swaps, and options.
- Recognize basic credit derivatives, such as credit default swaps (CDS).
- Explain how those securities are employed to form hedging strategies, in the context of corporate risk management.
- Define and explain the basic stochastic processes concepts used in the analysis of financial derivatives, and to reproduce key derivations that utilize them.
- Acquire the basic tools to solve derivative pricing problems, via replicating/hedging portfolios as well as with risk-neutral pricing.
- Apply those tools to the pricing of forwards/futures, the design of swaps, as well as the pricing of options on binomial trees and with Black-Scholes valuation.
- Face-to-face lectures
- Exercises (exercises, database, software etc.)
- Case studies /Incidents (traditional, online)
The learning experience of this course starts from face-to-face lectures. In addition to those, I distribute problem sets on a weekly basis. The problem sets are not graded, but allow you to apply the analytical tools illustrated in class and practice for the exam. I also discuss a number of case studies, with the purpose of understanding how the tools you acquire in class can be applied in the real world, where the environment is more complex and the relevant data are not laid out as clearly as in your textbook. In addition, some of the classes and the problems sets will discuss coding applications, encouraging you to write computer code to develop a deeper understanding of the theory. Throughout the course, and particularly when discussing case studies, I encourage you to bring your own views and share your insights.
The grade is determined by a combination of the performance on the final exam and on two online tests, which are distributed during the course via Bboard.
- On the first time you sit the exam, your grade is determined as (a) 70% times the grade on the final exam plus 15% times the grade on each of the two online tests, or (b) 100% times the grade on the final exam (whichever is more favorable to you).
- For any resit, your grade is determined exclusively by the final exam, i.e. you forfeit the score on the two online tests.
- In all cases, the exam questions aim to assess your understanding, knowledge, and ability to apply the the concepts and tools you acquire during the course about hedging with financial derivatives and pricing thereof.
- The exam questions range from solving problems, to simple derivations based on the theory, to discussions of the relevant institutional aspects of the securities we study.
- There is no distinction between attending and non-attending students.
- The textbook is: J. Hull, Options, Futures, and Other Derivatives, Pearson. I have been following the 9th edition; however any reasonably recent edition (including a more recent one) work.
- In addition to the textbook, we also read and discuss a number of case studies. The cases are purchased by the Library for you, and are made available to you via a link, which I publish on Bboard shortly after the start of the course.