Module overview
This module explores the key concepts and theories of financial derivatives. The focus is mainly on futures and options whose underlying asset is a financial asset (e.g., stock index options). Students will learn how to price these derivatives with the use of suitable pricing models. Additionally, they will learn how to use them to implement various risk management strategies. Overall, this module will enable students to possess a solid knowledge on derivatives and will give them the foundation to read further in the area and at a more advanced level (e.g., high quality journals).
Aims and Objectives
Learning Outcomes
Knowledge and Understanding
Having successfully completed this module, you will be able to demonstrate knowledge and understanding of:
- how we can value stock options using appropriate models based on no-arbitrage arguments and risk neutral valuation.
- the concepts and market mechanics of different types of financial derivatives;
- how we can utilise financial derivatives to create trading strategies and hedge against risk;
Transferable and Generic Skills
Having successfully completed this module you will be able to:
- combine and apply various methods and techniques to specific problems;
- enhance their quantitative skills.
- be efficient in problem solving with respect to financial derivatives;
Subject Specific Intellectual and Research Skills
Having successfully completed this module you will be able to:
- implement risk-neutral valuation to derive the Black-Scholes-Merton option pricing model;
- determine the prices of forwards, futures and options using appropriate models;
- apply dynamic hedging strategies to manage risk.
- differentiate among various derivative products;
- construct and explain trading strategies using financial derivatives;
Syllabus
- Forwards, Futures and Options
- Hedging with Forwards and Futures
- Pricing of Forwards and Futures
- Properties of Stock Options
- Trading Strategies involving Stock Options
- Binomial Trees
- Wiener Processes & Ito’s Lemma
- The Black-Scholes-Merton Model
- Hedging Parameters: The Greek Letters
Learning and Teaching
Teaching and learning methods
The course will consist of 6 weekly 4-hour lectures covering both theory and problem solving. In the first part of each lecture, PowerPoint slides are used to deliver the relevant material and provide the key concepts and theories. The second part is devoted to class exercises which involve various numerical and quantitative techniques with the aim to enhance the level of understanding and strengthen the quantitative skills of students.
Type | Hours |
---|---|
Independent Study | 126 |
Teaching | 24 |
Total study time | 150 |
Resources & Reading list
Textbooks
Steele, J. M. (2012). Stochastic calculus and financial applications (Vol. 45). Springer Science & Business Media.
Shreve, S. E. (2004). Stochastic calculus for finance II: Continuous-time models (Vol. 11). Springer Science & Business Media..
Strang, G. (2014). Differential Equations and Linear Algebra. Wellesley-Cambridge Press..
Merton, R. C. (1992). Continuous-Time Finance.. Wiley.
Hull, J. C (2011). Options, Futures, and Other Derivatives. Prentice Hall.
Copeland, T. E., Weston, J. F. and Shastri, K. (2005). Financial Theory and Corporate Policy. Pearson.
Assessment
Formative
This is how we’ll give you feedback as you are learning. It is not a formal test or exam.
Class discussions
- Assessment Type: Formative
- Feedback: Formative feedback will be given during classes, lectures and in-person during the office hours or via e-mail when appropriate.
- Final Assessment: No
- Group Work: No
Summative
This is how we’ll formally assess what you have learned in this module.
Method | Percentage contribution |
---|---|
Closed book Examination | 100% |
Referral
This is how we’ll assess you if you don’t meet the criteria to pass this module.
Method | Percentage contribution |
---|---|
Closed book Examination | 100% |
Repeat
An internal repeat is where you take all of your modules again, including any you passed. An external repeat is where you only re-take the modules you failed.
Method | Percentage contribution |
---|---|
Closed book Examination | 100% |
Repeat Information
Repeat type: Internal & External