25620 Derivative Securities
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particular session, location and mode of offering is the authoritative source
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Subject handbook information prior to 2017 is available in the Archives.
Credit 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)
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 which students may expect to encounter in practice.
Subject learning objectives (SLOs)
| 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 |
Contribution to the development of graduate attributes
The subject contributes to the Bachelor of Business by providing students with an understanding of derivative financial instruments. This subject will develop technical skills relevant to making informed decisions regarding the use of derivative securities (including hedging, trading and arbitrage strategies), their valuation (and the valuation of the underlying security), and the management of associated risks, for example, using index futures or options to maintain the value of an equity portfolio. These technical skills are linked to the Faculty’s graduate attribute that looks at developing business orientated skills. Students will apply technical skills through a variety of online and offline practice questions, during tutorial classes, and via assessment tasks (in-class quiz, group assignment and final exam).
This subject specifically introduces the following program learning objectives:
1.2. Critically analyse relevant concepts to understand practice in business and related professions in a global workplace
5.1. Apply technical and professional skills necessary to operate effectively in business and related professions
Teaching and learning strategies
The teaching strategies and learning materials for Derivative Securities have been developed for a culturally diverse student body. They incorporate a range of blended learning strategies which require students developing their knowledge of course content from lecture slides, textbook readings, video recordings, and homework and online multiple choice questions prior to attending class. This knowledge developed through readings and practice questions enables active learning for students when they attend classes through face-to-face instruction, and class discussion between students when completing questions in tutorial classes. Students will use UTSOnline to access relevant information and for online collaboration with staff and peers using the discussion board forum.
Content (topics)
- Relationship between forward, futures and spot prices
- Hedging strategies using financial futures and forwards
- Nature of swaps and how they are valued
- Basic properties of stock options and trading strategies
- Option pricing using binomial trees and the Black and Scholes model
- Modifications to Black and Scholes model to option valuation
- Hedging positions in options and synthetic options
Assessment
Assessment task 1: Assignment (Group)
| Objective(s): | This addresses subject learning objective(s): 1, 2 and 3 |
|---|---|
| Weight: | 20% |
Assessment task 2: Quiz (Individual)
| Objective(s): | This addresses subject learning objective(s): 1, 2 and 3 |
|---|---|
| Weight: | 25% |
Assessment task 3: Final Examination (Individual)
| Objective(s): | This addresses subject learning objective(s): 1, 2 and 3 |
|---|---|
| Weight: | 55% |
| Length: | 120 minutes |
Minimum requirements
Students must achieve at least 50% of the subject’s total marks.
Required texts
Hull, J.C, Fundamentals of Futures and Options Markets, 8th edition, Pearson. The textbook is the "Global Edition" and has a largely blue front cover.
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), Link to Guide to Writing Assignments:
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)
