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, 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
Specific 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 asset prices, volatility, etc.
To quantify the relationship between forward or futures prices and spot prices.
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 discuss and implement numerical procedures to calibrate aforementioned models so that they are consistent with observed market prices, and compute the values of derivative securities within these models.
To examine how the risks inherent in derivative securities can be measured and managed.
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: pricing and trading.
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, futures options, transaction costs, stochastic volatility.
Volatility modelling: Implied Volatility Surfaces, volatility derivatives.
Measuring and managing the risk of options portfolios.
Numerical methods and exotic options.
Applications of option pricing techniques.
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.
- Demonstrate a comprehensive understanding of the principles of pricing derivatives by replication, and how these principles can be extended to cater for non-standard features.
- Assess and critically evaluate the benefits and risks involved in derivatives trading.
Indicative reading list
Hull J.C. Options, Futures and Other Derivatives (11th edition), Pearson 2022
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
Bossu S Advanced Equity Derivatives: Volatility and Correlation Wiley 2014
Subject specific skills
Interpret and evaluate price quotes of derivative securities.
Implement derivative pricing models to price options and calculate risk measures.
Interpret risk measures to deduce the sensitivities of derivative portfolios to risks.
Transferable skills
Written communication.
Numeracy.
Study time
| Type | Required |
|---|---|
| Lectures | 9 sessions of 2 hours (12%) |
| Seminars | 8 sessions of 1 hour (5%) |
| Private study | 49 hours (33%) |
| Assessment | 75 hours (50%) |
| Total | 150 hours |
Private study description
Private study to include preparation for lectures and seminars
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 DD
| Weighting | Study time | Eligible for self-certification | |
|---|---|---|---|
Assessment component |
|||
| Class participation | 10% | 7 hours | No |
Reassessment component is the same |
|||
Assessment component |
|||
| On-campus Examination | 90% | 68 hours | No |
|
|||
Reassessment component is the same |
|||
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