BUS-F526 Derivative Securities

• 7 weeks
• 1.5 credits
• Prerequisite(s): BUS-F520

This course introduces the markets of derivative securities and their applications. The course provides in-depth and practical knowledge of derivative securities and conveys the following three major ideas.

1. Financial Engineering: For each derivative security, it is basic to understand its profits and losses (P/L) as well as the risks involved. Derivative securities are often used to transform the P/L of a portfolio or transfer risks of a financial position. The practice of P/L transformation and risk transfer is called financial engineering. This course uses various trading strategies to make students familiar with the P/L when a derivative security is combined with the underlying asset or with other derivative securities. Trading strategies often imply restrictions on the pricing of derivative securities. Meanwhile, price restrictions often guide the construction of hedging and arbitrage strategies.

2. Security Valuation: Valuation of a derivative security is often a challenging task. This course introduces the most important models for derivative securities valuation. The most basic principle in derivative securities is no-arbitrage pricing. This principle leads to a powerful approach called risk-neutral pricing. This approach delivers three important valuation tools: binomial trees, Black-Scholes formula, and Monte Carlo simulation. These tools can be applied to a wide range of derivative securities that include the options on equity and fixed-income securities as well as many exotic derivatives.

3. Risk and Hedging: Understanding the risks of positions in derivative securities is extremely importance in practice. The basic measures of risks in derivative securities are the "Greeks" and volatility. This course covers "Greeks" and volatility extensively and teaches students to build dynamic trading strategies for hedging the risks in derivative securities. The course also teaches the implications and applications of implied volatilities. Students learn how to assess and manage portfolio of derivative securities.

The course is designed for highly motivated students who possess strong curiosity in the derivatives markets. It focuses on economic concepts and business reasoning, although the analyses are sometimes quantitative. Students do not need to have advanced training in mathematics. Particularly, calculus is unnecessary for the course. The instruction consists of lectures, class discussions, readings, exercises, assignments, and exams.

Course Materials: Options, Futures, and Other Derivatives by John Hull, Teacher's handouts

Grading Criteria: class participation, exercises, written assignments, quizzes, exams