The University of Southampton
Courses

ECON6042 Financial Derivatives

Module Overview

The module studies quantitative techniques for pricing the main financial derivatives available for trading in financial markets. This is done under assumptions imposing absence of arbitrage opportunities in financial markets. The module focuses on futures and forwards on bonds and stocks, swap contracts and stock options. The module also introduces students to the use of the Bloomberg platform and discusses the main tools for pricing and trading financial derivatives with real market data.

Aims and Objectives

Module Aims

To provide students with a good fundamental understanding of financial derivatives. These trading instruments include forward contracts,futures contracts, swap contracts and stock options. Emphases will be placed on three aspects of derivatives – the nature of their payoffs, how they are priced and how they can be used for hedging and speculative purposes.

Learning Outcomes

Learning Outcomes

Having successfully completed this module you will be able to:

  • Demonstrate knowledge and understanding of derivative securities
  • Demonstrate knowledge and understanding of how forward contracts, futures contracts, swaps and options work, how they are used and how they are priced
  • Describe and explain the fundamental features of a range of key financial derivative instruments
  • Decide which securities to use for hedging and/or speculative purposes

Syllabus

This course covers forward contracts, futures contracts, swaps, and options. The main topics to be covered are • Valuation of futures and forward contracts • Valuation of swap contracts • Stock options: valuation, hedging and trading strategies • Valuation of stock options using binomial trees • The Black-Scholes model and the Greek derivatives

Special Features

No special features are envisaged for this module

Learning and Teaching

Teaching and learning methods

The module is divided into lectures, classes and practical sessions in the Bloomberg trading room. Lectures are used for explaining the theory of financial derivatives. Classes are used for solving problems related to the theory. Practical sessions are used to familiarize students with the Bloomberg platform and understand the basics to use this software for understanding the functioning of financial markets. Lectures will be based on material provided in Power Point slides and explanations on the blackboard. Problem solving sessions will consist of explanations of the lecturer solving questions from problem sets and interaction with students. Practical Bloomberg sessions will be taught on the Bloomberg trading suite and will be very practical and interactive.

TypeHours
Independent Study80
Teaching20
Total study time100

Resources & Reading list

Other. Most of the material relevant for the course (lecture notes, problem sets, past exams, feedback) is provided in Blackboard. Lecture notes are based on the textbook (available in the University library)

Options, Futures, and Other Derivatives. 

Applied derivatives: options, futures, and swaps. 

Derivative Securities. 

Assessment

Assessment Strategy

Midterm exam (1.30 hour exam). Formative assessment Final exam (2 hour exam). Summative assessment. Provide solutions to the exams and upload them in Blackboard. Explain the solutions during a class, if time allows.

Summative

MethodPercentage contribution
Exam  (2 hours) 90%
Exam  (1.3 hours) 10%

Referral

MethodPercentage contribution
Exam 100%

Repeat Information

Repeat type: Internal & External

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