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25762 Synthetic Financial Products

UTS: Business: Finance and Economics
Credit points: 6 cp

Subject level: Postgraduate

Result Type: Grade and marks

Requisite(s): 25741 Capital Markets
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 an introduction to the management of portfolios using options in financial markets. Stock, index, debt and foreign currency options are discussed, as well as forward and futures contracts and options on these instruments. It discusses the role of such instruments as risk-transferring devices.

Subject objectives/outcomes

On successful completion of this subject students should be able to:

  1. Understand the characteristics and main uses of forward, futures and options contracts.
  2. Use arbitrage principles to derive the relationship between prices of derivative securities and those of their underlying assets.
  3. Understand how basic derivative securities are used to attain desired payoff profiles and the risks involved.
  4. Use derivative instruments to set up static and dynamic hedging strategies.
  5. Understand the no-riskless arbitrage approach to pricing derivative securities and an ability to carry out basic pricing calculations within the binomial framework.
  6. Apply the Black-Scholes framework to derivative security pricing and hedging issues.

Contribution to graduate profile

The course compliments the knowledge gained in the investments and corporate finance areas in that it introduces the use of derivative securities to hedge risk. This has become an increasingly demanding and important area and is relevant to both fund managers and corporate treasurers.

Teaching and learning strategies

The subject will be taught using a combination of lectures and workshops. These classes will be supplemented with both printed and electronic learning materials and resources. The UTS web-based communication tool (UTS Online) will be used to share information and encourage interaction between staff and students. Students will also use appropriate computer software such as spreadsheets and word processors to complete assigned tasks.

Content

  • Derivative Securities
  • Mechanics of Futures and Forward Markets
  • The Determination of Forward and Futures Prices
  • Hedging Strategies using Futures
  • Trading Strategies involving Options
  • Pricing of Stock Options
  • Options on Index, Currencies and Futures
  • Hedging Option Positions
  • Interest Rate Options.

Assessment

Assessment item 1: Assignment/Case Study (individual)

Objective(s): 1-6
Weighting: 30%
Task: The Assignment/Case Study is designed to assess students' understanding of the theories and concepts, as well as their practical application, to demonstrate that students have met objectives 1-6.

Assessment item 2: Mid-semester exam (Individual)

Objective(s): 1-3
Weighting: 30%
Task: The mid semester exam is designed to assess students' understanding of the theories and concepts to demonstrate that students have met objectives 1-3.

Assessment item 3: Final Exam (Individual)

Objective(s): 1-6
Weighting: 40%
Task: This exam, consisting of multiple choice and short answer questions, will test students' understanding of the theory and their ability to apply the theory. This will enable students to demonstrate that they have met objectives 1-6