Course Syllabus Course Instructor Information: Professor: Farid AitSahlia Office: Stuzin 310 Office Hours: By appointment Phone: 352-392-5058 E-mail: farid.aitsahlia@warrington.ufl.edu Class Room/Time: Stuzin 104 T R, Periods 3-4 Course Description and Objectives This course presents and analyzes derivatives, such as forwards, futures, and options. These instruments have become extremely popular investment tools over the past several decades, as they allow one to tailor the amount and kind of risk one takes, be it risk associated with changes in interest rates, exchange rates, stock prices, commodity prices, inflation, weather, etc. They are used by institutions as well as investors, sometimes to hedge (reduce) unwanted risks, sometimes to take on additional risk motivated by views regarding future market movements. The course defines the main kind of derivatives, shows how they are used to achieve various hedging and speculating objectives, introduces a framework for pricing derivatives, and studies several applications of derivative-pricing techniques outside derivative markets. By its very nature a course like this involves some advanced mathematics and statistics. However, in this course the math will be kept to the minimum that is required (the higher level math will be relegated to Appendices and will be optional). The goals are to (a) understand the characteristics of various derivatives, (b) take a look at the black box so as to understand the pros and cons of various models that are widely used, and (c) gain some experience in applying these instruments and models for valuation, risk management and financial engineering. Course Pre-requisites Required class pre-requisite is EITHER FIN 4504 OR FIN 4243 Students should have a good knowledge of basic finance concepts, including risk, return, arbitrage, efficient markets, and the time value of money. In addition, a course in basic statistics and probability theory would be useful. The course will involve a significant amount of numerical calculation and modeling using a computer; therefore, fluency in the Tentative Course Outline FIN 4934 Derivatives Page 1/7
use of a spreadsheet package such as EXCEL is essential. Knowledge of calculus is not required, but would be helpful. Required material Text: John C. Hull, Fundamentals of Futures and Options Markets, Eighth Edition, Prentice Hall. NOTE: Software: You can easily follow the course with an earlier version of the book (either the 6 th or 7 th ) as I will not cover everything from the text. The latest version contains material related to recent events, particularly those involved in the financial crisis of 2008. I will however discuss them in class and thus you need not have the most recent version of the textbook. Some end-of-chapter exercises change from one edition to the next but I will post the assignments as they are listed in the 8 th edition. Software for derivative pricing (DERIVAGEM) is part of the text. Spreadsheets discussed in class will made available on the class website. Lecture Notes: Will be made available on the class website. Class Format This course will mainly use the lecture method of instruction. The lectures, supplemented by notes, examples and assignments are intended to familiarize students with the basic concepts, quantitative techniques, pricing, and institutional details necessary for making decisions involving derivatives. Assessment and Course Grade Course grade will be calculated using the following points Class Participation and Attendance Assignments 200 Individual/Group Midterm Exam 300 In - Class 100 Includes non-graded problems and attendance Final Exam 400 Assigned exam date in 8 th week Total Points 1000 Final course grades will be based on the following numeric scale indicating the number of total points needed to achieve each letter grade Minimum Points Course Grade 900 A 870 A- 840 B+ Tentative Course Outline FIN 4934 Derivatives Page 2/7
800 B 770 B- 740 C+ 700 C 670 C- 640 D+ 600 D 570 D- Note UF grading policy and GPA A = 4.0; A- = 3.67; B+ = 3.33; B = 3.0; B- = 2.67; C+ = 2.33; C = 2.0, C- = 1.67; D+ = 1.67; D = 1.0; D- = 0.67 Assignments The assignments will consist of several end-of-chapter problems (problem sets) that may involve option valuation using EXCEL and/or Derivagem, which is provided with the textbook. These assignments should be treated as equivalent to take-home exams. The reports should be typed or NEATLY written. Late report will incur a significant penalty and any assignment that is more than two days late will not be accepted. Midterm and Final Exam The exams will be closed book, but you will be allowed to bring one 8.5in by 11in sheet with formulas and other useful information. You can use both sides and you can handwrite or type. The exam will consist of numerical and qualitative conceptual questions. The questions will be very similar to the problems discussed in class, assignments submitted, and the sample exams. Attendance and Make-up Policy Attendance is mandatory. Each unexcused absence will result in a 25 point penalty. Further, if you have an unexcused absence on a quiz date, the quiz will be scored as a zero. An absence from class or missing a quiz is considered excused only if there is an acceptable reason according to UF guidelines, such as an unexpected medical situation, religious holidays, etc. The UF guidelines are here: https://catalog.ufl.edu/ugrad/current/regulations/info/attendance.aspx. According to the policy, it is the student s responsibility to notify me of an excused absence and provide documentation in a timely fashion. Class Participation and Attendance For each class, students should read the assigned chapters and also attempt the problem(s) that are given. Working in groups to solve the assigned problems is encouraged. It is highly recommended that students ask questions and actively participate in the class. Tentative Course Outline FIN 4934 Derivatives Page 3/7
Note Regarding In-Class Distractions Out of respect for fellow students, it is requested that all cell-phones, pagers, beepers, alarms, etc. be switched off or silenced before the beginning of each class. Also, you should not use your computer unless we are working on a problem or project that requires the use of the computer. You should bring your lap top to class. Students with Disabilities Students requesting testing accommodations must first register with the Dean of Students Office. The Dean of Students Office will provide documentation to the student who must then provide this documentation to the instructor when requesting accommodations. Please note that the Dean of Students Office requires a 7-10 day lead time to process your request after they receive the form back from you. More information is available on the DRC website, http://www.dso.ufl.edu/drc/. Tentative Course Outline FIN 4934 Derivatives Page 4/7
Weeks 1 & 2: 1. Introduction a. What are derivatives? b. The main types of derivatives c. Derivatives markets d. Reasons for trading derivatives e. Derivative pricing 2. Forwards and Futures a. Markets for forwards and futures b. Marking to market and margins c. Hedging strategies with futures and forwards d. Valuing forward contracts and the forward price e. Valuing futures Weeks 3: 3. Options a. The market for options b. Option payoffs c. Factors affecting option prices d. No-arbitrage restrictions; the put-call parity e. Early exercise of American options f. Trading strategies involving options Week 4: MIDTERM EXAM Review Session: Tuesday In- Class Exam: Thursday Weeks 4 & 5: 4. Valuing Options a. The binomial model b. The Black-Scholes model Weeks 5 7: 5. Hedging and the Greeks a. Greeks delta, gamma, vega, theta & rho b. The basic principle: delta-hedging c. Delta-hedging d. Asset mismatch, maturity mismatch, basis risk, and minimum-variance hedging e. Delta-Gamma hedging using options Tentative Course Outline FIN 4934 Derivatives Page 5/7
6. Special topics (time permitting) a. Financial engineering b. Exotic options c. Employee stock options 7. Review for final exam FINAL EXAM (Week 8) In-class exam (Date to be announced in class) Tentative Course Outline FIN 4934 Derivatives Page 6/7
Tentative Detailed Outline The schedule given below is only tentative, and may be changed based on the progress of the class. Lecture Number Topic Lecture Note Text (Ch.) Problem sets/assignments 1 Course Outline Introduction Outline LN 1 1 2 3 4 5 Mechanics of Futures Markets Hedging Strategies Using Futures Forward and Futures Pricing Mechanics of Options Markets LN 2 2 LN 3 3 Handout Assignment 1 LN 4 5 LN 5 9 6 Properties of options & Trading strategies involving options LN 6 & 7 10 & 11 Assignment 1 is due 7 Introduction to Binomial Trees Valuing Stock Options: The Black-Scholes Model LN 8 12 LN 9 14 8 MIDTERM EXAM IN-CLASS 9 Hedging and the Greeks LN 10 18 Hand out Assignment 2 10 Value-at-Risk (VaR) 11 Special Topics LN 11 LN 11A 21 12 Special Topics Assignment 2 is due 13 Review for the final exam 14 FINAL EXAM Scheduled time Tentative Course Outline FIN 4934 Derivatives Page 7/7