25620 Derivative Securities
UTS: Business: Finance and EconomicsCredit points: 6 cp
Subject level: Undergraduate
Result Type: Grade and marksRequisite(s): 25503 Investment Analysis OR 25906 Portfolio Theory and Investment Analysis (Advanced)
These requisites may not apply to students in certain courses.
There are also course requisites for this subject. See access conditions.
Handbook description
This subject provides a basic understanding of forwards, futures, swaps and options. It covers their valuation by arbitrage arguments, their use and the management of the associated risks. A large part of this subject is devoted to applied problems dealing with situations in which students may expect to encounter derivations in practice.
Subject objectives/outcomes
On successful completion of this subject students should be able to:
- understand derivatives pricing and use standard pricing formulae
- understand financial risks and nature of interest rate risk exposure
- understand how derivatives can be replicated by trading strategies in the underlying assets
- calculate and interpret Value at Risk.
Contribution to graduate profile
This subject provides students with a basic understanding of derivative financial instruments, their use, their valuation and the management of the associated risks. Derivatives play an important role in managing the risk of stock portfolios and may also be used in the pricing of equity and debt of a firm. The material covered in this subject has far reaching application to both investments and corporate finance and is therefore of prime relevance to the Finance major.
Teaching and learning strategies
The subject content will be covered in standard lecture mode. Materials covered in the lectures are reinforced by discussion of tutorial problems.
Content
- Relationship between forward, futures and spot prices
- Hedging strategies using financial futures and forward
- Nature of swaps and how they are valued
- Basic properties of stock options and the trading strategies
- Option pricing using binomial trees and the Black and Scholes model
- Modifications of the Black and Scholes model to option valuation
- Hedging positions in options and synthetic options
- Value at risk, calculations, interpretations and its limitations.
Assessment
Assessment item 1: Assignment (Group and Individual)
| Objective(s): | 1-4 |
| Weighting: | 20% |
| Task: | The assignment comprises two parts. Part A includes problems on topics covered in the first five lectures. Part B covers problems on the remaining course content. It is to be completed in group by students during the semester. The assignment thus assures objectives 1-4. |
Assessment item 2: Mid-Semester Examination (Individual)
| Objective(s): | 1-3 |
| Weighting: | 30% |
| Task: | The mid semester examination will assess students' understanding of the use and valuation of basic derivatives, which can be replicated by static portfolio strategies, i.e. forwards, futures and swaps. It assures objectives 1-3. |
Assessment item 3: Final Examination (Individual)
| Objective(s): | 1-4 |
| Weighting: | 50% |
| Task: | The final examination will require students to demonstrate that they have met objectives 1-4. It tests their proficiency in applying the techniques to hedging and arbitrage scenarios. |
Required text(s)
Hull, J.C. 2008, Fundamentals of Futures and Options Markets, 6th edition, Pearson / Prentice-Hall
Recommended text(s)
The Solutions Manual and Study Guide for the 2008, 6th edition of the textbook can be purchased with the textbook (the ISBN for the Solutions Manual is 0-13-242574-2). It is strongly recommended that you purchase the solutions manual, since answers to the tutorial questions from the textbook appear in this solutions manual and will not be made available on UTSOnline.
Software
Included with the prescribed Hull textbook is an Excel based software program on CD-ROM called DerivaGem (Version 1.51) which is very useful for the calculation of various topic areas such as option prices and Greek values. You would notice that some of the questions at the end of the textbook also refer to the DerivaGem software. You are encouraged to make use of this software as a part of your study program. (The author's website can be accessed at www.rotman.utoronto.ca/~hull for more information and updates on the software.)
Indicative references
Lecture overheads
The lecture notes (lecture slides) are available for purchasing from the UTS Union Shop. The lecture slides contain only the main points, equations and illustrative examples of the subject matter. They focus on the main topics and allow for discussion around those points in the classroom setting. Note that the lecture notes are not a substitute for the recommended textbook. Students should note the following:
- CN Number for 25620 Derivative Securities Lecture Notes — CN 3557.
- You must present the CN Number when purchasing or ordering the notes.
- When course notes are sold out, orders are taken on a prepaid basis only. These orders are then printed and are available for pick-up at the Union Shop on Wednesdays and Fridays. Students are given a receipt and this must be produced when collecting the Course Notes.
Additional readings
The following additional textbooks can be consulted for additional reading to the subject:
Chance, D.M. 2003. Analysis of derivatives for the CFA® program. Association for Investment Management and Research.
Chance, D.M. 2004. An introduction to derivatives and risk management. 6th ed. Thomson.
Frino, A. & Jarnecic, E. 2005. Introduction to futures and options markets in Australia. Pearson Prentice Hall.
Jarrow, R. J. & Turnbull, S. 2000. Derivative securities. 2nd ed. South-Western College Publishing.
Kolb, R.W. & Overdahl, J.A. 2007. Futures, options, and swaps. 5th ed. Blackwell Publishers.
McDonald, R.L. 2006. Derivatives Markets. 2nd ed. Pearson Addison Wesley.
Faculty of Business (2006), Guide to Writing Assignments (available through UTSOnline or at www.business.uts.edu.au/resources/guide.html)
Websites
The following websites are useful for this subject:
www.asx.com.au (Australian Stock Exchange)
www.sfe.com.au (Sydney Futures Exchange)
www.cmegroup.com (Chicago Board of Trade)
www.cme.com (Chicago Mercantile Exchange)
www.eurexchange.com (Eurex)
www.nymex.com/index.aspx (New York Mercantile Exchange)
www.rba.gov.au (Reserve Bank of Australia)
http://afr.com (Australian Financial Review)
www.futuresmag.com (Futures Magazine)
www.bba.org.uk (British Bankers' Association)
