Module overview
In the last 30 years derivatives have become increasingly important in finance and many different types of derivatives are actively traded on exchanges throughout the world. This module explores the pricing and use forwards, futures and options with a particular focus on contracts where the underlying asset is a financial asset - for example, a stock index (i.e. stock index futures or stock index options). Students will learn how to price these derivatives using various techniques as well as understand how we can use them for (i) speculating purposes, (ii) hedging strategies and (iii) cases where there are arbitrage opportunities.
Linked modules
Pre-requisite MANG2004
Aims and Objectives
Learning Outcomes
Knowledge and Understanding
Having successfully completed this module, you will be able to demonstrate knowledge and understanding of:
- the concepts and market mechanics of different types of financial derivatives;
- how these instruments can be used to implement risk management strategies.
- how financial derivatives are valued, based on the no-arbitrage and risk-neutral valuation approaches;
Subject Specific Intellectual and Research Skills
Having successfully completed this module you will be able to:
- price forwards, futures and options using suitable models and techniques;
- explain and apply trading/hedging strategies using futures and options.
- differentiate among different types of derivative products;
Transferable and Generic Skills
Having successfully completed this module you will be able to:
- enhance quantitative skills.
- identify appropriate techniques and apply them to particular problems;
- solve problems with respect to financial derivatives;
Syllabus
• Introduction to Forwards, Futures and Options.
• Hedging with Forwards and Futures.
• Pricing of Forward and Futures.
• Mechanics of Options Markets.
• Stock Option Trading Strategies.
• Mathematics of Options Pricing.
• Stochastic Processes and Ito's Lemma.
• The Black-Scholes-Merton Model.
• Dynamic Hedging and Risk Management with Options.
Learning and Teaching
Teaching and learning methods
This module will last one semester. It consists of about 34 sessions of 45 minutes each. These will be divided into about 24 lectures and 10 classes.
| Type | Hours |
|---|---|
| Wider reading or practice | 6 |
| Follow-up work | 75 |
| Preparation for scheduled sessions | 35 |
| Lecture | 24 |
| Seminar | 10 |
| Total study time | 150 |
Resources & Reading list
Textbooks
Hull, John. C (2018). Options, Futures and Other Derivatives. Prentice-Hall.
Assessment
Formative
This is how we’ll give you feedback as you are learning. It is not a formal test or exam.
In-class activities
- Assessment Type: Formative
- Feedback: Solutions to Multiple-choice will be given in each session and feedback on answers will be discussed in class. Numerical and theoretical exercises will be given out before hand and discussed in each seminar. Feedback will be given by the seminar teacher. You are also welcome to ask for further feedback during the feedback and advice hours.
- Final Assessment: No
- Group Work: No
Class discussions
- Assessment Type: Formative
- Feedback: Formative feedback will be given during classes, lectures and in-person during the office hours or via e-mail when appropriate
- Final Assessment: No
- Group Work: No
Summative
This is how we’ll formally assess what you have learned in this module.
| Method | Percentage contribution |
|---|---|
| Examination | 80% |
| Examination | 20% |
Referral
This is how we’ll assess you if you don’t meet the criteria to pass this module.
| Method | Percentage contribution |
|---|---|
| Examination | 100% |
Repeat
An internal repeat is where you take all of your modules again, including any you passed. An external repeat is where you only re-take the modules you failed.
| Method | Percentage contribution |
|---|---|
| Examination | 100% |
Repeat Information
Repeat type: Internal & External