Course description

Options and Futures

Introduction

Due to the remarkable growth in the use of financial derivative instruments, a basic understanding of derivative markets is essential not only to students and specialists in finance, but also to general business practitioners. The objective of this course is to provide students with a basic understanding of the pricing and hedging of options, futures and if time permits of swaps and other structured products. The course is designed around the central concepts of arbitrage, replication and hedging. While the economic reasoning behind these concepts will be strongly emphasized, some emphasis will also be placed on the practical aspects of the use of derivatives as well as the markets in which they are traded. This course would also prepare students for more advanced courses on derivatives.

Course content

  • Introduction to derivatives markets and derivative instruments
  • Basic strategies, insurance, hedging and speculation using options and futures
  • Financial forwards and futures: pricing and hedging
  • Commodity forwards and futures: pricing and cross-hedging
  • Parity and other option price relations
  • Binomial option pricing
  • Black-Scholes option pricing
  • Option Greeks and hedging
  • Interest rate forwards and futures (if time allows)

Learning outcome knowledge

The students will acquire a good understanding of the derivatives markets and the derivatives securities available for trading. More specifically the students will develop their understanding with respect to the following topics:

  • The derivatives markets which are the regulated exchanges and the over-the-counter markets, their participants, their basic functioning and the idiosyncrasies of each.
  • The structure and specifics of the basic derivative securities, futures, forwards, options and swaps.
  • The principles behind the pricing of each of the derivative securities, namely no-arbitrage when replication is possible and the bounds and relationships that the no-arbitrage assumption imposes.
  • Understand the applicability and limitations of the standard pricing techniques.
  • The economic role of the derivative securities and the way they are being used in practice.
  • The opportunities that derivative instruments provide and the dangers they hide.

 

Exam organisation

  • Multiple choice: 100%