IB9X7-15 Derivative Securities
Introductory description
This module aims to develop an in-depth understanding of the characteristics of different classes of derivative securities such as forwards and futures, swaps and options; the markets in which these securities are traded; their potential use as instruments for managing risk; methods for valuing these securities; and the application of these methods in other areas of finance.
Module aims
To describe the characteristics of different classes of derivative securities, their contract specifications and quoting conventions, and the mechanics of the markets in which these securities are traded.
To develop an intuitive understanding of the “absence of arbitrage” principle, and describe how this principle is used to derive relationships between the values of derivatives and fundamental parameters such as interest rates, asset prices, etc.
To quantify the relationship between forward price and spot price, and to illustrate the ways in which forward or futures contracts can be used to hedge risk.
To define forward interest rates, and to establish the relationship between forward and spot rates, and the values of interest rate swaps, caps and floors.
To develop models (Binomial, Black-Scholes and extensions) to describe the dynamics of underlying asset prices, and to derive theoretical methods for computing the values of derivative securities within the context of such models.
To examine the ways in which derivative securities can be used for risk management, and conversely, how the risk inherent in derivative securities can itself be measured and managed.
To develop an understanding of how option valuation techniques can be applied to value financial contracts with option-like payoffs and what the implications of these valuation methods are for financial decision-making.
Outline syllabus
This is an indicative module outline only to give an indication of the sort of topics that may be covered. Actual sessions held may differ.
Introduction.
Forwards and futures markets.
Futures pricing; using futures to hedge risks.
Forward rates and interest rate derivatives.
Options markets.
Strategies involving options.
Option pricing in the binomial model.
Black-Scholes pricing formula and the “Greeks”.
Extensions of valuation models e.g. American options, options on dividend paying assets.
Measuring and managing the risk of options portfolios.
Numerical methods and exotic options.
Applications of option pricing techniques e.g. real options, credit risk, executive stock options.
Learning outcomes
By the end of the module, students should be able to:
- Demonstrate a comprehensive understanding of the characteristics of different types of derivative securities, and the way in which they can be used for risk management.
- Demonstrate a comprehensive understanding of the principles of pricing derivatives by replication, and how these principles can be extended to cater for nonstandard features.
- Assess and critically evaluate the benefits and risks involved in derivatives trading.
Indicative reading list
Hull J.C. Options, Futures and Other Derivatives (9th - edition), Pearson 2018.
Sundaram R.K. & Das S.R. Derivatives (2nd - edition) McGraw-Hill 2016.
Jarrow R.A. & Turnbull S.M. Derivative Securities (2nd - edition), South-Western 2000.
Subject specific skills
Interpret and evaluate price quotes of derivative securities in the financial press.
Implement pricing models and generate risk reports.
Implement numerical methods to construct pricing models, calibrate them to market data, and compute option prices from them.
Transferable skills
Written communication.
Numeracy.
Study time
| Type | Required |
|---|---|
| Lectures | 9 sessions of 1 hour (6%) |
| Seminars | 8 sessions of 1 hour (5%) |
| Other activity | 9 hours (6%) |
| Private study | 49 hours (33%) |
| Assessment | 75 hours (50%) |
| Total | 150 hours |
Private study description
Private study to include preparation for lectures and seminars
Other activity description
1 hr per week will be either a face to face lecture or asynchronous tasks with either online or face-to-face support
Costs
No further costs have been identified for this module.
You do not need to pass all assessment components to pass the module.
Assessment group DC
| Weighting | Study time | Eligible for self-certification | |
|---|---|---|---|
Assessment component |
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| Class participation | 10% | 7 hours | No |
Reassessment component is the same |
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Assessment component |
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| On-campus Examination | 90% | 68 hours | No |
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Reassessment component is the same |
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Feedback on assessment
Feedback via My.WBS
Courses
This module is Optional for:
- Year 1 of TIBS-N4N3 MSc in Accounting and Finance
- Year 1 of TIBS-N300 MSc in Finance
- Year 1 of TECA-L1P6 Postgraduate Taught Economics
- Year 1 of TECA-L1P7 Postgraduate Taught Economics and International Financial Economics
- Year 1 of TIBS-LN1J Postgraduate Taught Finance and Economics