BF307 Derivative Securities

Transcription

1 BF307 Derivative Securities Academic Year: Semester: 1 Course Coordinator: William Leon Other Instructor(s): Pre-requisites: BF215 Investment No. of AUs: 4 Course Description and Scope Financial derivatives have grown at a phenomenal pace over the past two decades. However, there remain disagreements about the merits of derivatives. For example, Alan Greenspan, the former Chairman of the Federal Reserve Bank, believes that derivatives increase financial stability; whereas Warren Buffet, the famed investor, asserts that derivatives are financial weapons of mass destruction. This course helps students to gain better understandings of derivatives and introduces students to the usages and valuations of derivatives such as options, forward and futures contracts. Course Learning Objectives Students will learn how to use derivatives for investment and risk management purposes and how to price derivatives in the market. Students will also learn basic trading and arbitrage strategies using derivatives and their underlying assets. Learning & Teaching Methods 4 hours of seminar per week commencing in Week 1 and ending in Week 14. Course Assessments Coursework Participations / Assignments Two Quizzes Components Marks Individual/Group Individual / Group Individual Examination * 60 Individual Total 100 * The final examination is a restricted open-book exam; students may bring one textbook on derivatives/risk management or one A4-size sheet of paper with information on mathematical formulas, computation steps, etc., into the exam hall. 1

2 Assessment Plan Course Learning Objective Knowledge Acquisition Students should demonstrate knowledge and application ability of core curriculum such as being able to price derivatives in the market, to use derivatives for investment and risk management purposes, and to identify and exploit arbitrage opportunities. Problem Solving & Decision Making Students should develop abilities to identify, analyze, and solve financial problems. Assessment Method Assignments and quizzes that cover various topics in the core curriculum. Presentation of tutorial problem sets and group projects. Written examination. Readings & References CB** H Don M. Chance and Robert Brooks An Introduction to Derivatives & Risk Management, 9 th Edition South-Western, Cengage, 2012 (Call No.: HG6024.C454 & ISBN: ) John Hull Fundamentals of Futures & Options Markets, 7 th Edition Pearson, 2011 (Call No.: HG6024.H913I & ISBN: ) ** This is the primary reference textbook. Course Instructor(s) Instructor Office Phone William C. H. Leon S3-B1A achleon@ntu.edu.sg 2

3 Proposed Weekly Schedule Week Monday Topic Learning Objectives Readings / Activity Aug Introduction to Derivatives & Options Markets 1. Describe derivative markets and instruments. 2. Explain the differences between spot markets and derivative markets. 3. Describe the role and size of derivative markets. 4. Explain the criticisms of derivatives. CB Ch. 1 & 2 H Ch. 1 & Aug Principles of Option 1. Explain the differences between prices of European and American options. 2. Explain the bounds for option prices. 3. Describe the effect of exercise price, time to expiration, risk-free rate and volatility on an option price. 4. Explain the put-call parity relation. CB Ch. 3 H Ch Aug Binomial Option 1. Describe the concept of an option pricing model. 2. Explain the binomial option pricing models. 3. Describe how to establish and maintain a risk-free hedge. CB Ch. 4 H Ch. 12 & Sep Sep Black-Scholes- Merton Option 1. Describe the Black-Scholes-Merton option pricing model. 2. Explain the relation of the model s inputs to the option price. 3. Illustrate the adjustments to the model to accommodate put options and dividends. 4. Describe the concepts of historical and implied volatility. CB Ch. 5 H Ch. 13, 15 & Sep Basic Option 1. Explain the profit equations and graphs for positions in stock, call, put, covered call and protective put. 2. Describe the effect of choosing different exercise prices. 3. Describe the effect of closing out an option position early versus holding to expiration. CB Ch. 6 H Ch. 11 3

4 Week Monday Topic Learning Objectives Readings / Activity Sep Advanced Option 1. Explain the profit equations and graphs for option spread strategies, including money spreads, collars, calendar spreads and ratio spreads. 2. Explain the profit equations and graphs for option combination strategies including straddles and box spreads. CB Ch. 7 H Ch Oct Recess 9. 8 Oct Quiz 1 Forward & Futures Markets 1. Define forward and futures contracts. 2. Describe the institutional characteristics of forward and futures markets. 3. Describe the trading of futures contracts and the role of various parties. CB Ch. 8 H Ch Oct Forwards, Futures & Options on Futures 1. Explain the differences between price and value of forward and futures contracts. 2. Explain the carry arbitrage model for theoretical fair price. 3. Explain the pricing of options on futures. CB Ch. 9 H Ch Oct Futures Arbitrage 1. Describe futures spread and arbitrage strategies. 2. Explain the use of futures in market timing, alpha capture, and asset allocation. CB Ch. 10 (ignore interest rate arbitrages) Oct Hedging with Forward & Futures 1. Explain hedging concepts. 2. Describe the factors involved when constructing a hedge. 3. Explain how to determine the hedge ratios. CB Ch. 11 (ignore interest rate hedges) H Ch Nov Nov Quiz 2 Swaps 1. Describe the concept of a swap. 2. Describe the different types of swaps, based on underlying currency, interest rate, or equity. 3. Explain the pricing and valuation of swaps. 4. Describe strategies using swaps. CB Ch. 12 H Ch. 7 4

5 APPENDIX 3 NANYANG TECHNOLOGICAL UNIVERSITY NANYANG BUSINESS SCHOOL Academic Session , Semester 1 Recommendation of Text/s Not Available in the NTU Library For: BF307 Derivative Securities (Please fill in course code/title) An Introduction to Derivatives and Risk Management, 9th Edition Don M. Chance & Robert Brooks South Western Year of Publication 2012 ISBN No Year of Publication ISBN No. Year of Publication ISBN No. Submitted By: William Leon Division: ACC / BF / BL / SMO / MIB / ITOM Ext No.: