Financial Derivatives


Aims

 

  • Understanding the benefits and efficiency of hedging financial risks, and the financial derivatives available to obtain such hedges, including options, futures, forwards, and swaps
  • Recognizing/preventing possibilities of arbitrage
  • Study different ways to price derivatives, with a central role for the Black-Scholes model
  • Advanced quantitative analyses of all above points

Information

Derivatives, including options, forwards, and futures, are among the most important profit centers for investment banks. Especially new "exotic" derivative products are profit generators and hence, nearly every day new innovative products are introduced.In this course we consider the theory and practice of derivative securities concerning pricing, hedging, and risk management. Models to be studied include Black-Scholes, binomial trees, and risk-neutral Monte Carlo pricing. Further specific topics include no-arbitrage pricing relations; delta, kappa and gamma hedging; exotic options; portfolio insurance and other dynamic option replication trading strategies; futures and forward contracts; swaps.By its very nature the course uses a considerable amount of mathematics and statistics. However, of all subjects in finance, the area of derivatives has used these tools to the greatest profit.Our goals are:

  • To become proficient at the fundamental option calculations.
  • To open the "black box" so as to understand the pros and cons of the most widely used models.

Assessment

  • Assignments, essays, ...(15%)
  • Written (re-)examination with essay questions (85%)

Materials

Mandatory

  • Baxter, Martin and Andrew Rennie (1996), "Financial Calculus - An Introduction to Derivative Pricing", Cambridge University Press.

Recommended

  • Hull, John C. (2011), "Options, Futures, and Other Derivatives, 8th Edition." Englewood Cliffs, Prentice-Hall, NJ