FI 8200: DERIVATIVE MARKETS (Spring 2018) Class Information: Instructor Information: 5:30-9:45 pm Wednesday; Room 1215 Buckhead Center (January 10 through April 18; every other Wednesday) Professor Gerald D. Gay Room 1203, RCB Building (35 Broad Street) Office hours: You are always welcome and encouraged to drop by or call me anytime I'm around (which is a lot). Phone: (404) 413-7321 Fax: (404) 413-7312 Email: ggay@gsu.edu Course web site: http://www.gsu.edu/~fncgdg Course Prerequisites: Fi 8000 (Valuation of Financial Assets). CSP: 1,2,6. COURSE DESCRIPTION and OBJECTIVE This course focuses on the valuation, uses, and regulation of derivative instruments -- contracts or agreements whose values derive from the prices of underlying assets such as equities, commodities, interest rates, and foreign exchange. The course is presented from the perspectives of corporate risk managers and institutional professionals who use these valuable products for controlling market risks. Coverage is presented of both exchange and off-exchange derivatives including futures, forwards, swaps, options, and structured products including hybrid debt and depository instruments having embedded derivative features. The objective of this course is to provide students a working knowledge of the market for derivative instruments. This will include developing an understanding of their institutional and regulatory framework, the value to our economy of these important, risk-shifting tools, and how these products are specifically used by corporate managers and investment professionals for financial risk management and enhancing firm value. COURSE MATERIALS (1) Futures, Options, and Swaps, Robert W. Kolb and James A. Overdahl, Blackwell Publishing, 5th ed., 2007. (recommended but optional) (2) Miscellaneous articles and other current information of interest will be distributed throughout course. (3) You are expected to have access to a computer that can operate the software Option! and the Excel-based program *SWAP*.
2 TENTATIVE OUTLINE The following topics, schedule, and policies provide a general plan for the course; deviations may be necessary depending on class progress and other considerations. Reading assignments are to be completed prior to coming to class. 8 Class Session Schedule Session 1: January 10 The Value Proposition of Derivatives Use and Financial Risk Management a. Salomon Brothers case study: Linear (futures) derivatives application b. DECS offering case study: Non-linear (option) derivatives application c. Global market size and structure d. Channels for increasing corporate value e. Natural hedges and derivative substitutes Review/Preparation for class: Chapters 1-3; Watch videos at cmegroup.com (see course website for details) Session 2: January 24 Building Block 1: Futures and forward contracts a. Futures/OTC forwards as a price discovery tool (CME Fed Fund watch) b. Futures/OTC forwards: institutional arrangements, daily resettlement, margins and reading quotes c. Valuation and arbitrage i. general framework ii. extension to commodities, equities, foreign exchange iii. arbitrage illustrations Review: Chapters 4-6
Session 3: February 7 Managing interest rate risk with futures and forwards a. Hedging b. Immunization c. Active risk management 3 Read: chapters 5-6 Session 4: February 21 Equity and Portfolio Risk Management a. Stock Index futures: pricing, active and passive strategies b. Single Stock futures: pricing, liquidity, and strategies Read: Chapters 7-8 Session 5: March 7 Swaps: Part 1 a. The global market for swaps b. Interest Rate Swaps i. pricing ii. valuation iii. building the zero coupon curve iv. Using *SWAP* Read/Preparation: Swap Teaching Note to be distributed electronically. Familiarize yourself with all aspects of *Swap* software and ensure that it is properly functioning. Session 6: March 21 Swaps: Part 2 and Introduction to Options a. Currency Swaps b. Commodity Swaps
Building Block 2: Options a. Option Payoffs and Boundary Conditions b. Binomial Pricing c. Black Scholes 4 Read: Chapters 10-13 Session 7: April 4 Option extensions a. Dividends: discrete and continuous b. Using Options in financial risk management: the Greeks c. FX, Commodity and Futures Options d. American Options Read: Chapters 14, 16 Session 8: April 18 Introduction to Financial Engineering and Final Exam a. Structured and Hybrid Securities b. Final Exam Read: tbd ADMINISTRATIVE DETAIL (very important!) You are responsible for knowledge of any administrative announcements (e.g., test information, schedule and/or assignment changes) made at any time during scheduled class periods regardless of whether you are in attendance. Withdrawal Policy The last day to withdraw and possibly receive a "W" is February 27, 2018 (but please double check with the Registrar on this if you find this an issue). Note that a "W" is not automatic; please see the discussion in Section 1314 of the Graduate Catalog.
Attendance Policy You are allowed only one absence, so use it judiciously. Attendance may be taken orally, by sign-up sheet, by me passing out materials or handing back assignments, by my noticing that you are out, or by other means. If a sign-up sheet is used, it is the student s responsibility to ensure that they sign it to indicate their attendance. Beyond the one absence from class you must obtain prior consent of the instructor, but I will not likely be sympathetic. Absences above the limit allowed are grounds for withdrawal for which a W or WF for excessive absences can result. Absence from the first class counts towards the allowed limit even if you are not officially enrolled as of that time. 5 Students with Disabilities Students who wish to request accommodation for a disability may do so by registering with the Office of Disability Services in Suite 205 of the Student Center-East (404-413-1560). Students may only be accommodated upon issuance by the Office of Disability Services of a signed Accommodation Plan and are responsible for providing a copy of that plan to instructors of all classes in which an accommodation is sought. Academic Honesty The Department of Finance adheres to the University's policy on academic honesty as referenced in the policy on Academic Honesty section in Section 1350 of the Graduate Catalog. The section contains some examples of unacceptable conduct including plagiarism, cheating on examinations, unauthorized collaboration, etc. As previous culprits can attest, I will actively enforce the policy to ensure the integrity of the finance program and your degree, and to protect the interests of the vast honest majority of our students. For additional information regarding student conduct, please see the following link: http://codeofconduct.gsu.edu/ Grading There will be one exam given during the semester. There will be no make-up exams given so please arrange your schedules accordingly. In addition there will be various homework and other assignments, most of which will likely be collected and graded. The total available points are broken down in the table below. Homework assignments must be submitted immediately at the beginning of class on the due date. If you are absent from class you remain responsible for assignments made during that class and are subject to the same due date as the other students for submitting them. Thus, if you are to be absent, be sure to make arrangements for obtaining and submitting assignments prior to the due date. Final grades: In accordance with Departmental policy, it is expected that no more than 35 percent of the students will receive a grade of A+, A, or A-. The majority of the remaining students are expected to receive grades of B+, B, or B-. Those students demonstrating lagging performance shall earn grades of C+ or lower as appropriate.
The final grade will be dependent on student performance on a mid-term exam, a final exam, and various homework and other assignments. The weighting on each of these component will be approximately as follows: Grading Component Anticipated Points Weekly Homework Assignments 140 pts Financial Data Analytics Project 40 Final Exam 100 Total (approx.) 280 pts Your constructive assessment of this course plays an indispensable role in shaping education at Georgia State. Upon completing the course, please take the time to fill out the online course evaluation. Best wishes for a successful course and learning experience! 6