QF430 Introduction to Derivatives
Course Catalog Description
This course introduces students to financial derivatives. Common derivative securities such as forwards, futures, swaps, and options are discussed. Students learn how investors use derivative securities, how traders and market makers price and hedge their exposure to these securities, and how financial institutions and regulators maintain orderly markets in derivative securities. This is a general introduction to derivatives and does not discuss exotic securities or advanced numerical techniques.
The course is mostly lecture-based, relying heavily on the textbook. Students are expected to learn terminology and institution details as well as quantitative skills in pricing derivative securities. No prior knowledge of derivatives is expected. Students are expected to be familiar with time value of money concepts and investments or corporate finance. Knowledge of calculus is needed.
After successful completion of this course, students will be able to:
- Understand and compare uses of different derivative securities
- Distinguish between equilibrium pricing and absence-of-arbitrage pricing
- Price and hedge common derivative securities
- Explain institutional features of derivatives markets and regulation
- Avoid misconceptions about derivatives and misuses of derivatives
Fundamentals of Futures and Options Markets, John C. Hull, Pearson, Ninth Edition. ISBN: 978013408324. An electronic version is available at https://tinyurl.com/HullEbook
Solutions Manual: Student's Solutions Manual and Study Guide for Fundamentals of Futures and Options Markets, 9th Edition ISBN: 9780134083650.
Additional electronic resources (articles or cases) may be recommended during the course.
Format and Structure
- Lectures will cover theory and examples.
- Students will solve problems from the textbook, but these will not be collected or graded.
- Students will submit assigned problem sets which will be graded.
- Students will work on mathematical / programming assignment.
Participation: Be prepared for the class and ready to answer questions. Volunteering to answer, asking questions, connecting with current events, supporting or critiquing other viewpoints are all examples of positive participation. Participation is encouraged even if you are not sure of your answers or think your question is too basic. Participation can also occur outside of classroom if a student is more comfortable communicating outside class.
Problem Sets: Problem sets are due at class start time on the days indicated in the schedule and will be made available three class sessions before due date.
Team Projects: Details to be provided later.
Exams: There will be a Midterm exam and a Final exam. The Final exam will be based on everything covered in the class but with a heavy emphasis on material covered after Midterm. The exams will consist of numerical problems and conceptual questions requiring short answers.
Grades will be based on:
Attendance - 5%
Problem Sets - 30%
Team Projects - 15%
Midterm Exam - 25%
Final Exam - 25%
Late Policy Problem sets and team project late by less than 24 hours will be penalized 10%. There will be no credit for submissions that are late by more than 24 hours. Exceptions are unlikely but if you face a special circumstance, contact the instructor as soon as possible.
Tentative Course Schedule
- The schedule may be revised as the term progresses. Some topics may be omitted. Students will be informed of any revisions in class and through the course website.
- The readings refer to textbook chapter numbers and must be read in advance.
- Problem sets are due at class start time and will be assigned three class sessions before due date.
|3||Futures markets||Chapter 2|
|5||Hedging with futures||Chapter 3|
|7||Interest rates||Chapter 4|
|9||Forward and futures prices||Chapter 5|
|11||Interest rate futures||Chapter 6|
|16||Options markets||Chapter 9|
|17||Stock options properties||Chapter 10|
|18||Financial engineering with options||Chapter 11|
|19||Binomial trees||Chapter 12|
|20||Stochastic processes||Chapter 13|
|21||Black-Scholes-Merton model||Chapters 13,15,16|
|22||Risk-neutral pricing||Chapter 13|
|23||Numerical valuation||Chapter 18|
|24||Option risk measures||Chapter 17|
|25||Credit derivatives||Chapter 23|
|26||Derivative mishaps||Chapter 25|