Derivatives

2 Credits
BU.232.710.81
Mondays/ 18 Aug 14/ 13 October 2014
a!! "
#arbor $ast %& 20'
Instructor
(erry )eitc*
Contact Information
+*one ,u&ber- .203/07117331
$1&ai! Address- t!eitc*123*u.edu
Office Hours
Mondays by a44oint&ent
Required Text and Learning Materials:
Hull J. C. (2008), Options, Futures and Other Derivatives, 8th Edition, Prentice Hall.
(*is is a standard te5tboo6 in deri7ati7es and co7ers a 8ide range o9 to4ics. "t is an i&4ortant boo6 to
*a7e in your 4ersona! !ibrary.
,ote- (*e 7t* $dition o9 t*e boo6 a!so 8or6s 7ery 8e!!. (*e 8t* $dition contains so&e in9or&ation
about t*e recent 9inancia! crisis .C*a4ter 8: 9or e5a&4!e/ and a 9e8 ot*er 7ery s&a!! .9or our 4ur4oses/
&odi9ications.
)ecture notes 8i!! be 4osted on B!ac6board .usua!!y 2 days/ be9ore c!ass.
A suggested: non1&andatory: additiona! reading-
arthinsen J. (20!0), "is# $a#ers% &ses and '(uses o) Financial Derivatives, Pearson Prentice Hall.
2nd edition.
(*is is a bedside1tab!e: entertaining boo6 8*ic* does not contain any 9or&u!ae. "t is a nice reading
8*ic* *e!4s understanding *o8: and 8*en: deri7ati7es 8or6.
Blackoard !ite:
A B!ac6board course site is set u4 9or t*is course. $ac* student is e54ected to c*ec6 t*e site
t*roug*out t*e se&ester as B!ac6board 8i!! be t*e 4ri&ary 7enue 9or outside c!assroo&
co&&unications bet8een t*e instructors and t*e students. ;tudents can access t*e course site at
*tt4s-//b!ac6board.3*u.edu. ;u44ort 9or B!ac6board is a7ai!ab!e at 118''1''<1'138.
Course "valuation:
As a researc* and !earning co&&unity: t*e Carey Business ;c*oo! is co&&itted to continuous
i&4ro7e&ent. (*e 9acu!ty strong!y encourages students to 4ro7ide co&4!ete and *onest 9eedbac6 9or
t*is course. +!ease ta6e t*is acti7ity serious!y because 8e de4end on your 9eedbac6 to *e!4 us
i&4ro7e so you and your co!!eagues 8i!! bene9it. "n9or&ation on *o8 to co&4!ete t*e e7a!uation 8i!! be
4ro7ided to8ards t*e end o9 t*e course.
Disailit# !ervices:
=o*ns #o46ins Uni7ersity and t*e Carey Business ;c*oo! are co&&itted to &a6ing a!! acade&ic
4rogra&s: su44ort ser7ices: and 9aci!ities accessib!e. (o deter&ine e!igibi!ity 9or acco&&odations:
4!ease contact t*e Carey >isabi!ity ;er7ices O99ice at ti&e o9 ad&ission and a!!o8 at !east 9our 8ee6s
4rior to t*e beginning o9 t*e 9irst c!ass &eeting. ;tudents s*ou!d contact %ac*e! #a!! in t*e >isabi!ity
;er7ices o99ice by 4*one at 41012341<243: by 9a5 at 443102<11002: or e1&ai!-
carey.disabi!ity23*u.edu.
BU 232.710.81 1 >eri7ati7es ? )eitc* 1 +age 2 o9 0
Im$ortant %cademic &olicies and !ervices:
#onor Code
;tate&ent o9 >i7ersity and "nc!usion
;tudent ;uccess Center
"nc!e&ent @eat*er +o!icy
;tudents are strong!y encouraged to consu!t t*e =o*ns #o46ins Carey Business ;c*oo! ;tudent
#andboo6 and Acade&ic Cata!og and t*e ;c*oo! 8ebsite *tt4-//carey.3*u.edu/students/student1
resources/uni7ersity1and1sc*oo!14o!icies 9or detai!ed in9or&ation regarding t*e abo7e ite&s.
Course Descri$tion:
(*e ai& o9 t*is course is to o99er a ric* o7er7ie8 o9 9or8ards: 9utures: s8a4s and o4tions. (*e course
8i!! co7er bot* t*e actua! 8or6ing o9 deri7ati7es and t*e ana!ytica! too!s needed to e99ecti7e!y
understand deri7ati7es. ;6i!!s are de7e!o4ed in 4ricing ana!ysis: use o9 4ricing &ode!s: trading: and
*edging strategies. (*e strategies are de7e!o4ed to &atc* s4eci9ic econo&ic goa!s: suc* as 4ort9o!io
ris6 reduction: 9or instance.
+rereAuisite.s/- BU.231.'20 or BU.70'.701 or B$.70'.701
Course Overvie':
(*ere *as been a dra&atic gro8t* in &ar6ets 9or 9inancia! deri7ati7es in recent years. "n todayBs
business 8or!d: &anagers can: and so&eti&es &ust: use 9inancia! deri7ati7es suc* as 9utures:
o4tions: and s8a4s to *edge ris6. (*e 4ur4ose o9 t*is course is to 4ro7ide students 8it* t*e
necessary s6i!!s to 7a!ue and e&4!oy 9utures: o4tions: and ot*er: re!ated: 9inancia! instru&ents. (*is
course 8i!! co7er bot* t*e actua! 8or6ing o9 deri7ati7es and t*e ana!ytica! too!s needed to e99ecti7e!y
understand deri7ati7es. (*e course ba!ances t*eory and a44!ications.
"t is di7ided into t*ree &ain 4arts.
+art 1-
a/ or8ards and utures
b/ +ricing or8ards and utures
c/ #edging using or8ards and utures
+art 2-
d/ ;8a4s
e/ +ricing ;8a4s
9/ (rans9or&ing Assets and )iabi!ities using ;8a4s
+art 3-
g/ O4tions
*/ +ricing O4tions
i/ (rading strategies using O4tions
+art 4 .ti&e 4er&itting/-
3/ Case not to use deri7ati7es- +orsc*e. C@: and C;D .!in6 to #B% case 8i!! be 4osted/
6/ (*e ro!e o9 deri7ati7es in t*e 4resent econo&y.
(inance and !ocial Res$onsiilit#:
(*e e99ecti7eness and 4ercei7ed integrity o9 9inance *a7e been tested in recent years. A!ong 8it*
4re7entab!e e5cesses and regrettab!e distortions: 9inancia! inno7ation *as: *o8e7er: a!8ays been an
e99ecti7e &eans 9or society to ac*ie7e its goa!s: 9ro& insurance to consu&4tion to sa7ing. (*e 4o8er
o9 9inancia! inno7ation as a generator o9 inc!usi7e 4ros4erity and 8ides4read 8e!!1being can .and
s*ou!d be/ rec!ai&ed. "n t*is conte5t: o4ti&iEation o9 s*are*o!derBs 7a!ue ? 9or instance ? &ay not be
t*e on!y &etric a!ong 8*ic* 9inancia! success is &easured and s*ou!d be 4!aced: a!ong 8it* ot*er
traditiona! 9inance &etrics: in t*e broader conte5t o9 its contribution to society. (o t*is e5tent: Carey
encourages tec*nica!: non1ideo!ogica!: e5c*anges o9 ideas !eading to a better understanding o9 t*e
broader ro!e o9 9inance as a 9orce 9or s*ared 4ros4erity. (*e reading )to e announced* 4ro7ides an
initia! o44ortunity 9or tec*nica! discussions o9 t*ese issues as t*ey re!ate to t*e to4ics co7ered in
F>eri7ati7esG.
BU 232.710.81 1 >eri7ati7es ? )eitc* 1 +age 3 o9 0
!tudent Learning O+ectives for T,is Course:
A!! Carey graduates are e54ected to de&onstrate co&4etence on 9our )earning Hoa!s:
o4erationa!iEed in eig*t )earning Ob3ecti7es. (*ese !earning goa!s and ob3ecti7es are
su44orted by t*e courses Carey o99ers. or a co&4!ete !ist o9 Carey !earning goa!s and
ob3ecti7es: 4!ease re9er to t*e 8ebsite *tt4-//carey.3*u.edu/9acu!ty1researc*/!earning1at1
carey/!earning1assess&ent.
>eri7ati7es are assets 8*ose 7a!ue de4ends on t*e 7a!ue o9 ot*er assets. >eri7ati7es are co&4!e5
instru&ents and: to 9u!!y understand t*e& and e&4!oy t*e& succes9u!!y: it is i&4ortant to ta6e into
account &u!ti4!e 9actors. (*is is in !ine 8it* Carey )earning Hoa! 1.1.
Iuantitati7e tec*niAues oug*t to be ba!anced 8it* Aua!itati7e ana!ysis. (*e course 8i!! discuss rea!
business cases in 8*ic* t*e so!e use o9 Auantitati7e tec*niAues *as: 9or instance: !ead to ban6ru4tcy1
ty4e situations. (*is is in !ine 8it* Carey )earning Hoa! 1.2.
ina!!y: t*e nature and structure o9 deri7ati7es &ay !end itse!9 to 9raudu!ent be*a7ior. (*e course 8i!!
brie9!y ana!yEe instances in 8*ic* deri7ati7es &ay !ead: and *a7e !ead: to unet*ica! be*a7ior. (*is is
in !ine 8it* Carey )earning Hoa!s 3.1 and 3.2.
!tudent Learning O+ectives for t,is course:
).O. J !tudent Learning O+ectives for t,is course
1 Kou s*ou!d be ab!e to 4rice 9utures and 9or8ards
2 Kou s*ou!d be ab!e to *edge ris6 e54osure using 9or8ards and 9utures
3 Kou s*ou!d be ab!e to use s8a4s 9or trans9or&ing assets and !iabi!ities
4 Kou s*ou!d be ab!e to trade o4tions
0 Kou s*ou!d be ab!e to 4rice o4tions
' Kou s*ou!d be ab!e to &a6e in7est&ent and *edging decisions by co&bining
Auantitati7e and Aua!itati7e tec*niAues
%ttendance &olic#:
+artici4ants are e54ected to attend a!! sc*edu!ed c!ass sessions. ai!ure to attend c!ass 8i!! resu!t in
an inabi!ity to ac*ie7e t*e ob3ecti7es o9 t*e course. u!! attendance and acti7e 4artici4ation are
reAuired 9or you to succeed in t*is course.
%ssignments:
;tudents 8i!! be as6ed to sign a state&ent t*at eac* test and assign&ent is t*eir o8n 8or6 and t*ey
*a7e abided by t*e *onor code.
;tudents are not a!!o8ed to use any e!ectronic de7ices during in1c!ass tests. Ca!cu!ators 8i!! be
4ro7ided i9 t*e instructor reAuires t*e& 9or test ta6ing. ;tudents &ust see6 4er&ission 9ro& t*e
instructor to !ea7e t*e c!assroo& during an in1c!ass test. (est scri4ts &ust not be re&o7ed 9ro& t*e
c!assroo& during t*e test.
#o&e8or6 .20L/- (*ere 8i!! be 2 *o&e8or6 assign&ents: eac* 8ort* 10L. (*e assign&ents *a7e a
7ery i&4ortant 4edagogica! ro!e. (*ey are designed to c*ec6 your understanding o9 t*e &ateria!
co7ered in c!ass. Kou can 8or6 on t*ese in grou4s .&a5i&u& 3 4eo4!e/ but you do not *a7e to do so:
i9 you so c*oose. (*e assign&ents 8i!! be graded in *undreds.
IuiEEes .20L/- (*e AuiEEes 8i!! be s*ort .&a5i&u& 101&inute !ong/. (*ey 8i!! be c!osed1boo6. $ac*
AuiE is 8ort* 10L o9 t*e 9ina! grade. Bot* AuiEEes are &andatory and cannot be substituted 9or a
*ig*er 8eig*t on t*e 9ina! e5a& or t*e assign&ents.
ina! $5a& .'0L/- (*e .cu&u!ati7e/ 9ina! e5a& 8i!! be bet8een 2 and 3 *our !ong. "t 8i!! be c!osed1
boo6.
BU 232.710.81 1 >eri7ati7es ? )eitc* 1 +age 4 o9 0
"valuation and -rading
Assign&ent )earning Outco&e @eig*t
IuiEEes 110 20L
#o&e8or6 110 20L
ina! $5a& 110 '0L
Im$ortant .otes aout -rading &olic#:
(*e grade o9 % is reser7ed 9or t*ose 8*o de&onstrate extraordinaril# excellent 4er9or&ance. (*e
grade o9 %/ is a8arded on!y 9or excellent 4er9or&ance. (*e grade 9or good 4er9or&ance in t*is
course is a B01B. (*e grades o9 >M: >: and >1 are not a8arded at t*e graduate !e7e!.
+!ease re9er to t*e Carey Business ;c*oo! ;tudent #andboo6 9or grade a44ea! in9or&ation
*tt4-//carey.3*u.edu/students/student1*andboo61and1acade&ic1cata!og/
Tentative Course Calendar: ($he instructor reserves the ri*ht to alter course content or ad+ust the
pace to acco,,odate class pro*ress)
@ee6 Content %eading Hoa! #@
2 Introduction to t,e
Course3 (utures and
(or'ards
#u!!: c*s 1 N 2 and
0
1.1 (o introduce students to t*e
8or!d o9 deri7ati7es.
1.2 (o understand t*e 4ricing o9
9utures and 9or8ard contracts.
;tudents 8i!! !earn *o8 to use
t*e no1arbitrage condition to
4rice 9or8ards and 9utures.
4 452 &ricing (utures and
(or'ards
454 (utures Hedging
!trategies
2.1 #u!!: c* 0
2.2 #u!!: c* 3
2.1 (o understand t*e 4ricing o9
9utures and 9or8ard contracts
.continued/.
2.2 (o understand *edging using
9utures and 9or8ard contracts.
6 Interest Rate (utures #u!!: c*s 4 N ' (o 4ro7ide an introduction to bond
4ricing and discuss interest rate
9utures. "nterest rates 9utures *a7e a
di99erent structure t*an co&&odity
or eAuity 9utures. ;tudents 8i!! !earn
*o8 interest rate 9utures .8it* an
e&4*asis on $urodo!!ar 9utures/
8or6.
Ho,e-or# !
posted on
.lac#(oard
/ui0 !
7 Interest Rate and (oreign
Currenc# !'a$s
#u!!: c* 7 (o study s8a4 contracts on interest
rates and currencies: 8*y t*ey are
use9u!: and *o8 t*ey can be
structured in 4ractise.
8 852 O$tions and O$tion
Markets
854 O$tion Trading
!trategies
0.1 #u!!: c*s < N 10
0.2 #u!!: c* 11
0.1 (o understand o4tion &ar6ets.
;tudents 8i!! !earn *o8 to co&4ute
u44er and !o8er bounds o9 o4tion
4rices and t*e re!ation bet8een 4ut
and ca!! o4tion 4rices .4ut1ca!!
4arity/. (*e no1arbitrage condition
8i!! be a44!ied to deri7e a!! resu!ts.
0.2 @*at are t*e &ost i&4ortant
trading strategies 8it* o4tionsO @*y
are t*ese trading strategies
i&4ortant and 8*at do t*ey rea!!y
ac*ie7eO ,o8 is t*e ti&e to !earn it.
Ho,e-or# 2
posted on
.lac#(oard
9 Binomial Trees and T,e
Black/!c,oles/Merton
#u!!: c*s 12 N 14 (o understand *o8 to 4rice o4tions
using trees. (*e B!ac61;c*o!es1
BU 232.710.81 1 >eri7ati7es ? )eitc* 1 +age 0 o9 0
O$tion &ricing Model Merton 4ricing &ode! 8as
de7e!o4ed in 1<74 but it is sti!! t*e
base!ine &ode! 9or 4ricing o4tions.
@e deri7e it and discuss its 4ricing
i&4!ications. /ui0 2
: T,e -reek Letters #u!!: c* 18 (*e Hree6s re4resent t*e
sensiti7ities o9 o4tion 4rices 8it*
res4ect to c*anges in t*e under!ying
4ara&eters. ;tudents 8i!! !earn t*e
&eaning o9 t*e Hree6 !etters: *o8 to
co&4ute t*e&: and *o8 to use t*e&
e99ecti7e!y to deri7e success9u!
*edging strategies.
; (inal "xam
Co$#rig,t !tatement
&nless e1plicitl2 allo-ed (2 the instructor, course ,aterials, class discussions, and e1a,inations are
created )or and e1pected to (e used (2 class participants onl2. $he recordin* and re(roadcastin* o)
such ,aterial, (2 an2 ,eans, is )or(idden. 3iolations are su(+ect to sanctions under the Honor Code.