MFE 527: Derivative Securities

Textbook Information

  • Required:  Options, Futures, and Other Derivatives (11th edition), by John Hull. The ISBN numbers are 9780136939979. 9780136940043, and 9780136940043R180. These ISBNs are for the same book but different purchasing/renting options.
  • Optional: Bodie, Z., Kane, A., & Marcus, A. Investments: Irwin Mcgraw-Hill. Please note: Any edition from the past five years will suffice. You may have this book already if you have taken (or are taking) FIN 420 Investments.

Published Remarks

  • None

Hardware Requirements

  • Recommended: Financial calculator: Texas Instruments BA-II Plus or equivalent (HP-10BII calculator).

Software Requirements

  • None

Proctored Exams

  • None

Course Description

This course introduces the student to the major derivative securities that are the tools in the management of financial risk: futures, forwards, swaps and options. The course will expose students to potential critiques of traditional financial theory based on recent empirical results, including the global financial crisis of 2007 - 2009. While examining the characteristics and pricing of these instruments, students will also explore how corporations utilize these contracts to reduce their financial risk exposure. The course also explores the practical differences between hedging, speculation and arbitrage. The objective of this course is to examine the important financial characteristics of derivative securities such as swaps, forward, futures, and options contracts and their roles in managing individual and corporate financial risk. Students will apply these concepts in an effort to integrate a comprehensive risk management approach. Among the topics explored for each of these securities are the history and evolution of formalized exchanges, the mechanics of each contract, price relationships, and the theory and practice of hedging. Basic valuation concepts as well as applications and strategies will be emphasized, as well as extensions based on recent innovations in financial engineering and the financial literature.

Overview

This course introduces the student to the major derivative securities that are the tools in the management of financial risk: futures, forwards, swaps and options.  While examining the characteristics and pricing of these instruments, we will also explore how corporations utilize these contracts to reduce their financial risk exposure. The course also explores the differences between hedging, speculation, and arbitrage. The objective of this course is to examine the important financial characteristics of derivative securities such as swaps, forward, futures, and options contracts and their roles in managing individual and corporate financial risk. Among the topics explored for each of these securities are the history and evolution of formalized exchanges, the mechanics of each contract, price relationships, and the theory and practice of hedging. Basic valuation concepts, as well as applications and strategies, will be emphasized You will also be more than qualified to pass the information contained in the Derivatives section of the CFA Level I Exam (approximately 5% of the exam content).

Objectives

When you have successfully completed this course, you will be able to:

  • Explain the basic characteristics of futures, options, and swaps (derivative securities).
  • Describe the structure of global futures, options, and swaps markets.
  • Explain the simple arbitrage relationships that form the basis for all derivatives pricing.
  • Apply valuation models to derivative securities.
  • Utilize computer technology in the evaluation and execution of derivatives strategies.
  • Design derivatives portfolios for risk management in trading and corporate finance.
  • Develop investment strategies and hedge investment portfolios using derivatives.

Course Requirements and Grading

Grade Components Percentage of Grade
Online Discussions (2 total) 5%
Homework (14 total) 28%
Mid Term Exams 1 & 2 (10% Each) 20%
Final Exam 20%
Online Summaries (4 total) 4%
Risk Management Project (Group Project) 5%
Options Strategies Project 1 (Group Project) 8%
Options Strategies Project 2 (Group Project) 10%
Total 100%