SCHOOL OF BANKING & FINANCE

Transcription

1 Objective SCHOOL OF BANKING & FINANCE OPTIONS, FUTURES AND RISK MANAGEMENT TECHNIQUES FINS3635 Course Outline - Session 1, 2005 This course is to provide a rigorous introduction to the fundamental pricing principles and hedging techniques in the derivative markets. It focuses on the main types of options and futures contracts. It is designed to acquaint the student with the tools that are necessary to analyse the common issues in the derivative markets. The development of futures and options trading is also discussed. On completion, students will be able to understand the mechanics of buying, selling, exercising, and settling the derivatives, determine the value of the derivatives, and use the derivatives to manage financial risk. Prerequisites Prerequisite is FINS 2624 Portfolio Management. It is the responsibility of students to ensure that the prerequisite has been met before commencing this course. Lecturers and Tutors David Colwell Office: QUAD 3065 Phone: Fax: d.colwell@unsw.edu.au Consultation Hours: TBA Julia Henker (Tutor-in-Charge) Office: QUAD 3058 Phone: Fax: j.henker@unsw.edu.au Consultation Hours: TBA FINS3635 1

2 Li Yang (Lecturer-in-Charge) Office: QUAD 3059 Phone: Fax: Consultation Hours: Tuesday 10:00-12:00 Lectures Monday 14:00-16:00 QUAD 1027 Wednesday 16:00-18:00 ME 303 Tutorials T01a Mon 10:00 11:00 Webster 138 T02a T03a Mon 13:00 14:00 QUAD GO54 Mon 16:00 17:00 QUAD GO26 T04a Tue 12:00 13:00 OMB 228 T05a T06a Wed 15:00 16:00 K17 B02 TBA Tutorial enrolment is done by the Faculty via the Tutorial Allocation System (TAS). If you have not entered your preferences into TAS, you will need to do it in week one. If you have any problem about the enrolment, you should contact the tutor-in-charge as soon as possible. Textbook The prescribed textbook for this course is Options, Futures and Other Derivative Securities, by John C. Hull, 5 th Ed., Prentice-Hall, Reference Book Fundamentals of Futures and Options Markets, by John C. Hull, 4 th Ed., Prentice-Hall, Other Readings The Futures Game, Who Wins, Who Loses, and Why, by R., Teweles and F.,Jones, McGram-Hill, Options as a Strategic Investment, by L. G. McMillan, 3 rd Ed., New York: New York Institution of Finance, FINS3635 2

3 Cox, J., S. Ross, and M. Rubinstein. Options Pricing: A simplified Approach, Journal of Financial Economics, 7 (1979), Black, F., and M. Scholes. The Pricing of Options and Corporate Liability, Journal of Political Economy, 81(1973), Mertion, R. C. Theory of Rational Option Pricing, Bell Journal of Economics and Management Science, 4(1973), WebCT The lecture notes and important announcements will be available at the WebCT course site, which can be accessed from the WebCT log-in page at Assessment Assessment is based on two examinations and one group project (all components are compulsory), and the assessment scheme is as follows: Mid-Session Examination 45% Final Examination 45% Project 10% The Mid-session examination will be held in Week 7 and covers materials in both the textbook and the lecture notes during the first six weeks of lectures. It will be comprised of multiple choice and calculation questions. The examination is close book. The venue and time are to be announced in the class as well as the WebCT course site. The final examination will cover materials in both the textbook and the lecture notes during the last seven weeks of lectures. It will be comprised of multiple choice and calculation questions. It will be held during the UNSW Exam Weeks. The examination is also close book. All examinations are conducted in accordance with the UNSW Rules for the Conduct of Examinations and it is the student s responsibility to be familiar with these rules. For more information, refer to the UNSW examination website at: The group project is about futures trading and designed to provide students the opportunities of applying the futures theory in the real world. More information on the project is available at the WebCT course site. FINS3635 3

4 Special Consideration Rules of special considerations are published on UNSW website student gateway and the School of Banking & Finance website. Attention is drawn to the following extract from the University of New South Wales Calendar Procedures : Students who believe that their performance in a subject, either during the session or in an examination, has been adversely affected by sickness or any other reason should inform the Registrar and apply for special consideration in the determination of their standing. The application must be made on the Application for Special Consideration form available from the Student Centre. Such requests should be lodged as soon as is practical and in any event no more than three days after the exam for which special consideration is sought. A photocopy of all material supporting an application for special consideration, as lodged with the Registrar, must also be provided to the Lecturer-in-charge within seven days of any event for which special consideration is sought. For special consideration on medical ground, students must inform their doctors to post a copy of the results of any laboratory tests conducted to the lecturer-in-charge directly within seven days of their availability. Students must also inform their doctors that the lecturer-in-charge and/or the Examination Assessment Committee may approach them to discuss and learn about the medical condition in details. Supplementary Examination Students who apply for special consideration are advised that an Assessment Committee decides on the granting of supplementary assessment, lodging of applications for special consideration does not guarantee that supplementary assessment will be granted and/or that a pass in the subject will be given, it is your responsibility to be available for supplementary assessment during the specified period (holiday plans are not sufficient reason for non-availability), it is your responsibility to inform the University Student Centre of any changes to your addresses and telephone numbers, if the supplementary assessment is granted, it is your responsibility to check the details of the supplementary examination such as time and venue, an oral component of up to 20% of the marks allocated to the related examination may be included in the supplementary assessment. Academic Misconduct and plagiarism Students are reminded that the University regards academic misconduct and plagiarism as a very serious matter. More information about misconduct and plagiarism can be found at the Faculty web site of - misconduct. FINS3635 4

5 The following information is taken from p.23 of the Policy. Plagiarism entails taking and using as one's own, the thoughts or writings of another without acknowledgement including: (a) where paragraphs, sentences, a single sentence or significant part of a sentence which are copied directly, are not enclosed in quotation marks and appropriately footnoted; (b) where direct quotations are not used, but ideas or arguments are paraphrased or summarised, and the source of the material is not acknowledged either by footnoting or other reference within the text of the paper; and (c) where an idea, which appears elsewhere in print, film or electronic medium, is used or developed without reference being made to the author or the source of the idea. Lecture Outline Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Introduction to Derivative Markets Hull: Ch. 1, 19, 28, 29, & 30 Fundamentals of Futures Trading Mechanics of Futures Trading Settlement of a Futures Contract Hull: Ch. 2 Pricing Futures Cost-of-Carry Relation Hull: Ch. 3 Hedging with Futures Risks Hedging Strategies Hull: Ch.4 Interest Rate Futures Term Structure of Interest Rate Interest Rate Futures Contracts Hedging with Interest Rate Futures Hull: Ch. 5 Swap Interest Rate and Currency Swaps Valuation of Swaps Hull: Ch. 6 & 25 Week 7 Mid-Session Examination Week 8 Fundamentals of Options Mechanics of Options Markets Option Pricing Restriction: Arbitrage Relations Upper and Lower Bounds for Option Prices Put-Call Parity Hull: Ch. 7 & 8 FINS3635 5

6 Project Trading in Futures Markets Technical Analysis Fundamental Analysis Week 9 Week 9-10 Trading Strategies Involving Options Strategies Involving a Single Option and a Stock Spreads Combinations Hull: Ch.9 Binomial Option Pricing Model Single-Period Model Multi-Period Model Hull: Ch.10 & 18 Week Black-Scholes Option Pricing Model Stochastic Processes Modeling Behavior of Stock Price Ito s Lemma Black-Scholes Model Alternative Models for Stock Options Hull: Ch.11, 12, 15,17, & 20 Week 13 Week 14 Options on Stock Indices, Currencies, and Futures Specification of Contracts Valuations Hull: Ch. 13 Management of Market Risk Hedging with Options the Greeks Hull: Ch. 14 & 16 FINS3635 6