Derivative Securities Analysis

Learning Outcomes

Knowledge and Understanding

Having successfully completed this module, you will be able to demonstrate knowledge and understanding of:

• how we can value stock options using appropriate models based on no-arbitrage arguments and risk neutral valuation.
• the concepts and market mechanics of different types of financial derivatives;
• how we can utilise financial derivatives to create trading strategies and hedge against risk;

Transferable and Generic Skills

Having successfully completed this module you will be able to:

• be efficient in problem solving with respect to financial derivatives;
• combine and apply various methods and techniques to specific problems;
• enhance their quantitative skills.

Subject Specific Intellectual and Research Skills

Having successfully completed this module you will be able to:

• apply dynamic hedging strategies to manage risk.
• implement risk-neutral valuation to derive the Black-Scholes-Merton option pricing model;
• construct and explain trading strategies using financial derivatives;
• determine the prices of forwards, futures and options using appropriate models;
• differentiate among various derivative products;

• Forwards, Futures and Options
• Hedging with Forwards and Futures
• Pricing of Forwards and Futures
• Properties of Stock Options
• Trading Strategies involving Stock Options
• Binomial Trees
• Wiener Processes & Ito’s Lemma
• The Black-Scholes-Merton Model
• Hedging Parameters: The Greek Letters

The course will consist of 6 weekly 4-hour lectures covering both theory and problem solving. In the first part of each lecture, PowerPoint slides are used to deliver the relevant material and provide the key concepts and theories. The second part is devoted to class exercises which involve various numerical and quantitative techniques with the aim to enhance the level of understanding and strengthen the quantitative skills of students.

Formative

This is how we’ll give you feedback as you are learning. It is not a formal test or exam.

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.

Referral

This is how we’ll assess you if you don’t meet the criteria to pass this module.

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.