Derivative Securities Analysis

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

Subject Specific Intellectual and Research Skills

Having successfully completed this module you will be able to:

apply dynamic hedging strategies to manage risk.
differentiate among various derivative products;
implement risk-neutral valuation to derive the Black-Scholes-Merton option pricing model;
determine the prices of forwards, futures and options using appropriate models;
construct and explain trading strategies using financial derivatives;

Knowledge and Understanding

Having successfully completed this module, you will be able to demonstrate knowledge and understanding of:

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;
how we can value stock options using appropriate models based on no-arbitrage arguments and risk neutral valuation.

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;

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.

Study time
Type	Hours
Independent Study	126
Teaching	24
Total study time	150

Resources & Reading list

Textbooks

Hull, J. C (2011). Options, Futures, and Other Derivatives. Prentice Hall.

Strang, G. (2014). Differential Equations and Linear Algebra. Wellesley-Cambridge Press..

Copeland, T. E., Weston, J. F. and Shastri, K. (2005). Financial Theory and Corporate Policy. Pearson.

Steele, J. M. (2012). Stochastic calculus and financial applications (Vol. 45). Springer Science & Business Media.

Merton, R. C. (1992). Continuous-Time Finance.. Wiley.

Shreve, S. E. (2004). Stochastic calculus for finance II: Continuous-time models (Vol. 11). Springer Science & Business Media..

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.

Breakdown
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.

Breakdown
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.

Breakdown
Method	Percentage contribution
Closed book Examination	100%

Repeat Information

Repeat type: Internal & External