The University of Southampton
Courses

MANG6018 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

Module Aims

The main aim of the module is to provide students with a comprehensive background in derivative securities such as futures, forwards and options with a particular focus on contracts where the underlying asset is a stock market index. Students will be exposed to the mathematics underlying some of the related models and to realistic trading scenarios. Hence, they will develop important analytical skills such as using these financial derivatives to form various trading strategies or applying appropriate pricing models to determine their value. Finally, they will learn how traders manage different dimensions of risk when dynamic hedging is involved.

Learning Outcomes

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 can we utilize financial derivatives to create trading strategies and hedge against risk.
  • How can we value stock options using appropriate models based on no-arbitrage arguments and risk neutral valuation.
Subject Specific Intellectual and Research Skills

Having successfully completed this module you will be able to:

  • Differentiate among various derivative products.
  • Determine the prices of forwards, futures and options using appropriate models.
  • Construct and explain trading strategies using financial derivatives.
  • Implement risk-neutral valuation to derive the Black-Scholes-Merton option pricing model.
  • Apply dynamic hedging strategies to manage risk.
Transferable and Generic Skills

Having successfully completed this module you will be able to:

  • Be efficient in problem solving with respect to financial derivatives.
  • Combine and apply various methods and techniques to specific problems.
  • Enhance their quantitative skills.

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.

TypeHours
Independent Study126
Teaching24
Total study time150

Resources & Reading list

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

Assessment

Formative

Class discussions

Summative

MethodPercentage contribution
Examination  (2 hours) 70%
In-class Test  (1.17 hours) 30%

Repeat

MethodPercentage contribution
Examination  (2 hours) 100%

Referral

MethodPercentage contribution
Examination  (2 hours) 100%

Repeat Information

Repeat type: Internal & External

Costs

Costs associated with this module

Students are responsible for meeting the cost of essential textbooks, and of producing such essays, assignments, laboratory reports and dissertations as are required to fulfil the academic requirements for each programme of study.

In addition to this, students registered for this module typically also have to pay for:

Textbooks

Recommended texts for this module may be available in limited supply in the University Library and students may wish to purchase the core/recommended text as appropriate.

Please also ensure you read the section on additional costs in the University’s Fees, Charges and Expenses Regulations in the University Calendar available at www.calendar.soton.ac.uk.

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