25620 Derivative Securities
Warning: The information on this page is indicative. The subject outline for a particular semester, location and mode of offering is the authoritative source of all information about the subject for that offering. Required texts, recommended texts and references in particular are likely to change. Students will be provided with a subject outline once they enrol in the subject.
UTS: Business: FinanceCredit points: 6 cp
Subject level:
Undergraduate
Result type: Grade and marksRequisite(s): 25556 The Financial System
These requisites may not apply to students in certain courses.
There are course requisites for this subject. See access conditions.
Recommended studies: algebraic manipulations, basic elements of statistics (mean, variance, covariance and correlation), abstract mathematical concepts, basic principles in finance (the time value of money and risk-adjusted discount rates)
Handbook description
This subject provides students with 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
| 1. | explain derivatives pricing and use standard pricing formulae |
|---|---|
| 2. | discuss financial risks and how to manage them |
| 3. | illustrate the use of derivatives in the management of financial risks and in exploring financial arbitrage opportunities |
| 4. | calculate and interpret Value at Risk. |
Contribution to the development of graduate attributes
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 task 1: Assignment (Group and Individual)
| Objective(s): | This addresses subject learning objective(s): 1, 2, 3 and 4 |
|---|---|
| Weight: | 20 |
Assessment task 2: Mid-Semester Examination (Individual)
| Objective(s): | This addresses subject learning objective(s): 1, 2 and 3 |
|---|---|
| Weight: | 30 |
Assessment task 3: Final Examination (Individual)
| Objective(s): | This addresses subject learning objective(s): 1, 2, 3 and 4 |
|---|---|
| Weight: | 50 |
Minimum requirements
To pass the subject it is required to complete all the subject assessments and must score an overall grade of 50% or more. Students who achieved greater than 50% overall but failed any of these assessment requirements will receive an X grade.
Required texts
Hull, J.C. 2014, Fundamentals of Futures and Options Markets, 8th edition, Pearson
Recommended texts
The Solutions Manual and Study Guide for the 8th edition of the textbook can be purchased with the textbook. The Solutions Manual provides tentative answers to the tutorial questions taken from the textbook.
Software
Included with the prescribed Hull textbook is an Excel based software program on CD-ROM called DerivaGem (Version 2.01) which can be used to do calculations on various topics areas such as option pricing, Delta hedging and Greek values. Some of the questions at the end of the textbook chapters refer to the DerivaGem software. You are encouraged to make use of this software as 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.)
References
Lecture notes
The lecture notes (lecture slides) are available on UTSOnline under Course Documents. 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.
Additional readings
The following additional textbooks can be consulted for additional reading to the subject:
Chance, D.M. & Brooks, R. 2012. An introduction to derivatives and risk management. 9th ed. Thomson.
Frino, A. & Jarnecic, E. 2005. Introduction to futures and options markets in Australia. Pearson Prentice Hall.
Kolb, R.W. & Overdahl, J.A. 2007. Futures, options, and swaps. 5th ed. Blackwell Publishers.
McDonald, R.L. 2013. Derivatives Markets. 3rd ed. Pearson Addison Wesley. Faculty of Business (2006),
Guide to Writing Assignments (available at http://www.business.uts.edu.au/teaching/guide/guide.pdf)
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 (CME Group)
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)
