Introduction and module objectives:
The module is an introduction to the concepts and models underlying the modern analysis and pricing of financial derivatives, from vanilla calls and puts on stocks to complex exotics in the volatility, correlation and fixed income arenas. It will explore exchange-traded derivative instruments, with particular reference to futures and options contracts. The module will focus on derivatives whose underlying asset is a financial asset, for example a stock index (ie stock index futures or stock index options). Students will learn how to price these derivatives as well as use them for speculative purposes, hedging strategies and arbitrage opportunities. The required technical tools will be explored systematically, exposing students to the specialist language and enabling them to converse with derivatives professionals.
By the end of the module students should be able to:
- Demonstrate a comprehensive knowledge of options and derivatives;
- Critically analyze trading/hedging strategies using futures contracts;
- Identify and utilise advanced pricing models to value financial instruments, in particular options and derivatives, with appropriate rigour;
- Demonstrate a systematic understanding of the roles of arbitrage, speculation and hedging derivative financial markets, including the complexity and interactions inherent in these roles.
Method of assessment:
- Mid-module test (20%)
- Two hour examination (80%)