Derivative Securities Analysis

Learning Outcomes

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;
• apply dynamic hedging strategies to manage risk.
• determine the prices of forwards, futures and options using appropriate models;
• construct and explain trading strategies using financial derivatives;
• differentiate among various derivative products;

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.
• how we can utilise financial derivatives to create trading strategies and hedge against risk;
• the concepts and market mechanics of different types of financial derivatives;

Transferable and Generic Skills

Having successfully completed this module you will be able to:

• be efficient in problem solving with respect to financial derivatives;
• enhance their quantitative skills.
• combine and apply various methods and techniques to specific problems;

• 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

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.

Resources & Reading list

Textbooks

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.

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

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

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

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

Formative

This is how we’ll give you feedback as you are learning. It is not a formal test or exam.

Summative

This is how we’ll formally assess what you have learned in this module.

Referral

This is how we’ll assess you if you don’t meet the criteria to pass this module.

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.

Repeat Information

Repeat type: Internal & External